Sixth consecutive month of advances for inflation in the US. So far in 2021, each published data has surpassed the previous one, generating some alarm in the markets, especially in recent months.
The CPI stood at 5% year- on- year in May, driven once again mainly by the rise in energy (oil is already above $ 70), but also by the rest of the components that they shape the typical shopping basket of the American consumer. The CPI is at its highest since mid-2008.
Inflation is reaching highs that go beyond the last decade, but the central bank and a good part of the experts call for calm, because the factors that are causing this price boom are, in principle, temporary.
However, in each analysis there is a ‘but’ that leaves the door open for this inflation to go somewhat beyond what is expected. It is not only headline inflation, the underlying inflation (which does not include fresh food or energy) stood at 3.8% in May, the highest since the beginning of 1992 .
From TD Securities, for example, they agree with the Federal Reserve, which has repeatedly cited “transitory” factors as causing the price boom. However, the financial firm acknowledges that “it is likely that another increase in the prices of travel and second-hand cars will be reflected in a new push for the underlying CPI.
We had forecast an increase of 0.5% – 0.6% per month for the core and headline CPI. Also, base effects will be added again to year-on-year comparisons. We forecast 4.8% and 3.6% year-on-year for headline and core CPI respectively. ” The forecast of these experts has fallen short again and that was above the market consensus.
Some components are showing record highs. For example, second-hand cars and trucks have seen a price increase of almost 30% . Car rental companies are renewing their fleets (to cope with the demand of the economic reopening) and have to turn massively to second-hand cars, since new vehicles are in short supply right now due to the lack of chips semiconductors worldwide.
“This surge in demand has come at a time when the supply side of the economy is experiencing some acute disruptions.
On the goods side, the shortage of semiconductor chips, rising freight prices and Raw materials are driving up prices, but the most striking supply side problems in recent times are occurring in the labor market, where companies are struggling to rehire workers, despite the fact that more than a third of the jobs lost during the pandemic have not yet recovered (aid and social benefits could be discouraging the return to work in the US). As a result, companies have to increase wages, which provides one more reason to raise prices, “they explain from JP Morgan in a note for clients.
On the other hand, energy has risen 28%, driven mainly by the sharp rise in oil prices. But the story does not end here, the price of transport services has risen more than 11% year-on-year. Food or restaurant and hospitality services also rose between 2 and 3%, while clothing is 5.6% more expensive than a year ago. All the components of the CPI are contributing their grain of sand so that inflation reaches unsuspected levels a few months ago.
Inflation is clearly exceeding the Fed’s 2% target. However, the latest modification in its mandate allows this type of episodes to occur for a time to compensate for periods of low inflation, such as the year 2020.
This gives the Federal Reserve scope to keep interest rates at the same rate. 0% and its bond purchase program even though prices continue to far exceed its long-term goal of 2%. The question is how long the Fed will sit still or how far it can let inflation rise (albeit temporarily) before taking action.
The deflator also rises strongly
Not only is the CPI, an indicator is not definitive for the Fed although it does fall within the measures that it analyzes and monitors to make its decisions, also the PCE (proxy of the GDP deflator and the Fed’s fetish indicator ) is exceeding the number magical (that 2%). The overall PCE stood at 3.6% in April, hitting the highest since 2008.
However, the US Federal Reserve pays special attention to the underlying PCE , which is the same indicator as the PCE but does not weight fresh food and energy, which are the most volatile components of the price index.
The Fed has recognized on several occasions that it is this index that it pays the most attention to when conducting its monetary policy (raising or lowering rates, buying or selling bonds …). Well, the underlying PCE stood at 3.1%, the highest rate of change since May 1992.