US month-on-month CPI data released earlier showed inflation rising to a record annualized rate, exceeding expectations. Will the Fed be forced into earlier monetary tightening, and what might that mean for commodities, currencies, and stocks?
Today’s release of June’s US CPI data revealed that annualized inflation has jumped from 5.4% the previous month to 6.2% in June, which is the highest rate it has reached for 31 years. The consensus forecast before the release was expecting an annualized rate of only 5.8%. The real data has exceeded expectations for several consecutive months, which is significant in building a sense that inflation in the US is getting somewhat out of control. The US Federal Reserve has also changed its language about inflation in a tacit admission that its earlier expectation that higher “inflation” was transitory was incorrect.
Another alarming factor was that the monthly increase in the CPI was quite large: last month’s increase was only 0.4%, while this latest increase ran to 0.9%.
What is Behind the Rise in US CPI?
The CPI is calculated from the price changes in a basket of goods and services, weighted to reflect a representative sample that would be purchased by a wide cross section of the population in everyday life. Analysts like to drill down to see which sectors were most responsible for the overall change in the CPI to try to understand what is driving the change.
It is notable that core CPI, which excludes the relative volatile food and energy sectors, came in lower than overall CPI, at an annualized increase of only 6.4%.
It seems that the fuel for the rise in inflation is mostly down to a lack of capacity. A shortage of hires and supply chain problems mean that production is not keeping pace with demand, which causes price hikes. Of course, the scene was set by the strong rebound from the initial shock of the coronavirus pandemic in March 2020.
Will the High CPI Impact the Fed’s Policy?
Most analysts are seeing the continuing stronger than expected rises in US inflation as quite damaging to the Federal Reserve’s credibility. The Fed has only just begun tapering its long-running QE (essentially, printing money to purchase bonds on the open market) program this month. Just a few days ago Jerome Powell stated that the time was not yet right to raise rates.
The Federal Reserve will have to contend this blow to its credibility plus what is becoming a significantly large negative interest rate. When the rate of inflation is higher than the rate of interest, owners of US dollars are forced to either speculate or watch meaningful amounts shaved off their capital’s store of value. With a base rate of 1.25%, owners of US dollar lucky enough to get that interest rate on their savings now face an annualized depreciation rate just shy of 5%, not far from historic average returns on US stocks. Should investors begin to believe that there is no point in investing in the stock market, we can expect to…
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