InvestorQ : Why is it that the US inflation continues to rise despite rate hikes by the Fed?
vaishnavi mhatre made post

Why is it that the US inflation continues to rise despite rate hikes by the Fed?

vidhya Laxmi answered.
3 weeks ago

There has been a slight anomaly visible in the US economy. Normally aggressive rate hikes are supposed to bring down inflation rapidly. The Fed has already hiked by 150 basis points in 3 meetings. However, for the month of June, consumer inflation continues to be elevated at a 41-year high of 9.1%. This was announced by the US Bureau of Labor Statistics for June 2022. In fact, in just the last 2 months, the rate of consumer inflation in the US has shot up 80 bps from 8.30% to 9.10% and that remains a rather intriguing factor.

The issue is not just about inflation being high in the US, but about being relentless and merciless. From staying consistently above 7% and 8%, the inflation figure in the US has now crossed 9%. These levels were last seen in 1981, more than 41 years ago. For June, the sharp spike in inflation was notwithstanding the fact that core inflation tapered 10 bps from 6% to 5.9%. The pressure on the US inflation baseket came entirely from the food basket and the fuel basket. Gasoline at above $5 per gallon captures the gist of household inflation.

But the bigger concern is that inflation is just not reacting to rates; not one bit. For instance, since March 2022, the Fed has hiked rates by 150 basis points in 3 tranches. In other words, it has taken the rates up from a range of 0.00%-0.25% to 1.75%-2.00%. To amplify the impact, the Fed is also on a liquidity tightening drive via bond buying. There are still lot of rate hike expectation, but has not been instrumental in controlling the rate of inflation. That has triggered the debate as to whether rate hike should be 75 bps or 100 bps!