InvestorQ : What does US inflation at 9.1% really mean and will it mean more rate hikes?
swati Bakhda made post

What does US inflation at 9.1% really mean and will it mean more rate hikes?

Sam Eswaran answered.
4 weeks ago

It is more than 41 years since the US has seen such high inflation levels of 9.1%. Of course, one can argue that the FOMC will consider the PCE inflation and not the consumer inflation but that is the basis and the trigger anyways. While 75 bps rate hike in July appears to be on the cards, there is also talk it may be higher at 100 bps instead. Remember, the US had reported 7.9% inflation in February 2022, 8.5% in March 2022, 8.3% in April 2022 and 8.6% in May 2022. But June 2022 at 9.1%, is despite an extremely hawkish Fed.

Now broadly, there are parts to US inflation viz. food inflation, fuel inflation and core inflation. The core inflation is the residual inflation after the impact of food and fuel is removed. Core inflation actually fell by 10 bps from 6% last month to 5.9% this month but that was more than offset by the spike in food inflation and fuel inflation. The 9.1% inflation in June 2022, is the highest level recorded in over 41 years. On a yoy basis, the energy index spiked 41.6% in June 2022 while the food inflation index was at a 40 year high of 10.40%.

US inflation had fallen to 8.3% in April 2022 but that now appears to be chimerical as inflation has now 80 bps in the last 2 months. Now, why is this surprising? This is happening despite lower crude prices and lower prices of minerals and ores. However, food has been sticky due to supply chain constraints. In this period, the Fed has also cut rates by 150 bps and promises another 75 bps in July. Despite that, the inflation has been relentless showing that the real issue to address may be the supply side and not the demand side.

Let us quickly take a look at the high frequency MOM inflation. The Bureau of Labour Statistics (BLS) reports US inflation on a yoy basis and also on a MOM high frequency basis. In fact, most businesses look at the MOM inflation more closely compared to the yoy inflation which is too base effect intensive. MOM inflation in our context is the inflation for June 2022 over May 2022. The high frequency inflation for the month of June 2022 has spiked by 30 basis points from 1.00% to 1.30% and is at the highest level in 13 months.

What does this mean for Fed policy stance? Although, Fed has hiked rates by 150 bps in 3 FOMC meetings, there is still runaway consumer inflation. Obviously, something is being missed out. Already, the Fed is in a dilemma between monetary tightness and the risk of recession, which is getting more plausible by the day. It may hike the rates again by 75 bps in July 2022 although it is likely to eschew the temptation of hiking by 100 bps since that would leave the Fed with limited options going ahead.