US September inflation tapers to 8.2% but MOM inflation is higher

14 Oct 2022 , 06:19 AM

That implies; the Fed would be looking at another 75 bps rate hike in the November 2022 Fed meet and perhaps another 50 bps in the December meet.

Ironically, US consumer inflation has now remained above the 8% mark for 7 months in succession. February was the last time the Fed reported 7.9% inflation. Inflation touched a peak of 9.1% in June 2022. From there it tapered to 8.5% in July, 8.4% in August and now to 8.2% in September 2022. In short, the inflation is gradually headed lower, but it is more gradual and calibrated rather than the sharp fall that the Fed was expecting. The table below captures the consumer inflation trend in the US. While the blue line shows the headline inflation trend, the red line captures the core inflation trend of last 1 year.

Chart Source: US Bureau of Labour Statistics

Gasoline prices continued to taper lower but other heads of inflation were still putting pressure. There was a 4.9% fall in the gasoline index for the month of September 2022 on a sequential basis, but that was offset by a 0.8% spike in the food index even as the shelter index also spiked. While the gasoline index fell by 4.9%, the overall energy index fell by just 2.1% as there was a sharp spike in the prices of natural gas and electricity. In short, food inflation and core inflation continue to be resonant in the inflation basket and are offsetting any minor benefits that are available from the fall in gasoline prices.

Food and core inflation, even out gasoline price advantages

If you look at headline inflation over the last 3 months, it has fallen by 90 bps from 9.1% in June 2022 to 8.2% in September 2022. However, food inflation and core inflation are bearing the brunt of the supply chain bottlenecks, which continue to plague supplies. On the energy front, the price of crude has fallen sharply on recession concerns. However, the risks are still quite elevated. For instance, the OPEC has just cut the supply by 2 million barrels per day (bpd) and that has led to Brent Crude bouncing closer to the $100/bbl mark. Even assuming stability in crude prices, the prices of gas and electricity are still on an uptrend and any worsening of the Ukraine situation could again spike crude prices.

Category	Sep 2022 (YOY)	Category	Sep 2022 (YOY)
Food Inflation	11.20%	Core Inflation	6.60%
Food at home	13.00%	Commodities less food and energy	6.60%
Cereals and bakery products	16.20%	Apparel	5.50%
Meats, poultry, fish, and eggs	9.00%	New vehicles	9.40%
Dairy and related products	15.90%	Used cars and trucks	7.20%
Fruits and vegetables	10.40%	Medical care commodities	3.70%
Non-alcoholic beverages	12.90%	Alcoholic beverages	4.10%
Other food at home	15.70%	Tobacco and smoking products	8.20%
Food away from home	8.50%	Services less energy services	6.70%
Full service meals and snacks	8.80%	Shelter	6.60%
Limited service meals and snacks	7.10%	Rent of primary residence	7.20%
Energy Inflation	19.80%	Owners’ equivalent rent	6.70%
Energy commodities	19.70%	Medical Care Services	6.50%
Fuel oil	58.10%	Physician Services	1.80%
Gasoline (all types)	18.20%	Hospital Services	3.80%
Energy services	19.80%	Transport Services	14.60%
Electricity	15.50%	Motor vehicle Maintenance	11.10%
Natural gas (piped)	33.10%	Motor vehicle insurance	10.90%
Headline Consumer Inflation	8.20%	Airline Fare	42.90%

Data Source: US Bureau of Labour Statistics

One can infer 3 broad trends from the break up of the yoy inflation of 8.2% for September 2022. Firstly, food inflation (especially the food at home segment is sharply higher. Cereals, dairy products and vegetables are the key items that are feeling the pinch. Overall food inflation is now at a multi decade high of above 11%, with no signs of abating. Secondly, core inflation has been driven higher by the prices of services, which have contributed the most to inflation. For instance, air fares are up sharply amidst a return to normalcy. Lastly, with the OPEC cutting supplies by 2 million barrels per day (bpd) at the behest of Russia, it does look like the dividends of falling oil prices are done and dusted. That was the redeeming feature and it remains to be seen if monetary tightness has any impact now.

High frequency inflation is picking up momentum in the US

The US Bureau of Labour Statistics (BLS) reports inflation on a yoy basis, as well as on a MOM high frequency basis. The chart below captures the trend of MOM inflation. After touching a low of 0.00% in July 2022, the MOM inflation has again bounced back. While it is still below the 1% mark, it is closer to the year ago levels of 0.4%.

Chart Source: US Bureau of Labour Statistics

Between June and July, the MOM inflation fell from 1.30% to 0.00% and has now bounced back to 0.4% over the last 2 months. Here are some key MOM takeaways.

a)      On a MOM basis, food inflation remains a pain point at 0.7% as all 6 heads of groceries saw a spike in MOM inflation. The big MOM jump in the food basket was seen at 1.6% in fruits and vegetables and at 0.9% for cereals and bakery products.

b)      Energy index fell -2.1% MOM in September after falling -5.0% in August. However, the fall in gasoline prices is more than offset by a spike in electricity and natural gas prices. Going ahead, energy could also become a neutral part of the basket.

c)      Core inflation is a worry as it is structural. It was up 0.6% in August and again up 0.6% in September 2022. It is the services segment of core inflation like medical services, vehicle services and airlines that are contributing to a bulk of the core inflation spike.

Are we likely to see a change of heart in the Fed or will it continue its hawkish stance?

Fed stays hawkish, but RBI may have a bigger dilemma

For now, the Fed is likely to stay hawkish and target 75 bps in November and 50 bps in December. The Fed is likely to stick to a terminal rate of 5% for the Fed rates and that is a long way to go. Of course, the Fed still has the exorbitant privilege of the dollar being the preferred currency for all trade and commerce globally. That is evident in the way the dollar has strengthened against all the major currencies in the world and the Dollar Index (DXY) at a 22-year high. The Fed has reasons to stay hawkish; with inflation elevated at 8.2%, and hawkish is what the Fed will be. But, what about India?

That is where the RBI finds itself in a sort of dilemma. It needs to be in sync with the Fed as it cannot afford monetary divergence at this point. However, that is leading to IIP turning negative (as it has happened in August) and inflation relentlessly up (as is the case in September). Unfortunately, the RBI and the INR do not have the exorbitant privilege, so it has to take a call on whether the hawkish stance is really working for India. It will be a tough call, but it is time for the RBI to bite bullet and de-couple macro strategy from the US.