God save America; US inflation surges to 9.1% for June 2022
- India Infoline News Service
- 14 Jul , 2022
- 8:53 AM
The Bureau of Labour Statistics was quick to debunk the report as being false but the gist of the report was on track as headline inflation for June 2022 coming in at 9.1%. It is more than 41 years since the US has seen such high inflation levels and makes a 75 bps rate hike in July almost inevitable.
US Consumer Inflation has been on a sharp uptrend as evinced in the chart below. The US economy had reported consumer inflation at 7.9% in February 2022, 8.5% in March 2022, 8.3% in April 2022 and 8.6% in May 2022. For the month of June 2022, the US consumer inflation has surged by another 50 basis points to 9.1%.
Chart Source: US Bureau of Labour Statistics
The increase in inflation was despite core inflation falling to below 6%. The thrust came from food inflation, but substantially from fuel or energy inflation. The 9.1% spike in consumer inflation in June 2022, is the highest level of inflation recorded in over 41 years. The energy index spiked 41.6% in June 2022. Last month, food inflation had breached 10% for the first time in 40 years at 10.10%. In June 2022, that accentuated further to 10.40%
A quick look at the US Consumer Inflation basket for June 2022
After consumer inflation in the US fell to 8.3% in April 2022, it has gained 80 bps in the last 2 months. This is happening despite lower crude prices because on a yoy basis, oil and gas are still higher. Of course, core inflation (net of food and energy) tapered to 5.9%, but the spike in food and energy inflation was just too sharp in June 2022.
Data Source: US Bureau of Labour Statistics
There are two trends that emerge from the table above. Food inflation, especially food at home, continues to be sticky amidst heightened supply chain constraints. The same is the case with energy inflation also, where the gasoline prices have been hiked, transmitting the impact to the end user. Core inflation is marginally lower by 10 bps.
Why high frequency inflation is not too encouraging
The Bureau of Labour Statistics (BLS) reports US inflation on a yoy basis, as well as on a MOM high frequency basis. It looks at inflation for June 2022 over June 2021 and also 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%.
Chart Source: US Bureau of Labour Statistics
The MOM inflation at 1.3% is the highest in the last 13 months and shows a 100 bps spike over April, indicating that global headwinds are just too strong.
Here is what triggered the spike in high frequency inflation in June 2022.
a) Food inflation has spiked month-on-month by 1.0% in June 2022 on top of a 1.2% spike in May 2022. This is the sixth consecutive increase of 1% and above in food inflation.
b) Energy inflation was up month-on-month by 7.5% in June 2022, on top of 3.9% in May 2022. Natural gas spike at 8.2% was the fastest since 2005, while gasoline was up 11.2%.
c) The core inflation was up 0.7% in June on top of 0.6% in May 2022. The rent index witnessed the sharpest MOM rise since April 1986.
In terms of the Fed stance, it looks inevitable that the Fed would be impelled to hike rates by 75 bps in July 2022 FOMC meet. The 50 bps debate may now be put to rest.
Fed will prepare for another 75 bps rate hike in July 2022
Fed has already hiked rates by 150 bps in the last 3 FOMC meetings, taking the effective Fed rate to the range of 1.75% to 2.00%. Of course, the FOMC stance on rates is defined by the PCE (private consumption expenditure) inflation. However, since the PCE inflation would only be announced towards the end of July, the consumer inflation would be used as a proxy. With the spike in inflation, it looks almost inevitable that the FOMC would raise the rates by another 75 bps to the range of 2.50% to 2.75% in the July 2022 meet.
In the last few weeks, the Fed is caught in a dilemma between monetary tightness and the risk of recession. However, with consumer inflation at 9.1%, the Fed is unlikely to take chances. It is now almost a given that a 75 bps rate hike is on the cards. The FOMC may also look to get aggressive on bond book unwinding and even shift to $95 billion a month, sooner rather than later. That will amplify the impact of the rate hikes in controlling inflation. While the recession debate will continue, the FOMC would be more obsessed with bringing inflation under control!
A tale of 2 inflations – India and the US
There are two diverse trends that we get to see in global inflation. In India, the inflation has tapered from 7.79% in April 2022 to 7.01% in June 2022, thanks largely to the aggressively hawkish stance adopted by the RBI. On the other hand, US inflation has been rising despite the hawkish actions and ultra-hawkish noises by the Federal Reserve. That should provide some relief for the RBI in its monetary policy approach.
What will the RBI do when it meets next in August 2022? Indian inflation has remained above 7% so the RBI is unlikely to take chances. A 75 bps rate hike by the Fed in July (and that looks very likely) would prod the RBI to err on the side of caution and hike rates by 40 to 50 bps. The saving grace for India is; inflation is reacting favourably to RBI hawkishness!
US Consumer Inflation has been on a sharp uptrend as evinced in the chart below. The US economy had reported consumer inflation at 7.9% in February 2022, 8.5% in March 2022, 8.3% in April 2022 and 8.6% in May 2022. For the month of June 2022, the US consumer inflation has surged by another 50 basis points to 9.1%.
Chart Source: US Bureau of Labour Statistics
The increase in inflation was despite core inflation falling to below 6%. The thrust came from food inflation, but substantially from fuel or energy inflation. The 9.1% spike in consumer inflation in June 2022, is the highest level of inflation recorded in over 41 years. The energy index spiked 41.6% in June 2022. Last month, food inflation had breached 10% for the first time in 40 years at 10.10%. In June 2022, that accentuated further to 10.40%
A quick look at the US Consumer Inflation basket for June 2022
After consumer inflation in the US fell to 8.3% in April 2022, it has gained 80 bps in the last 2 months. This is happening despite lower crude prices because on a yoy basis, oil and gas are still higher. Of course, core inflation (net of food and energy) tapered to 5.9%, but the spike in food and energy inflation was just too sharp in June 2022.
| Category | June 2022 (YOY) | Category | June 2022 (YOY) |
| Food Inflation | 10.40% | Core Inflation | 5.90% |
| Food at home | 12.20% | Commodities less food and energy | 7.20% |
| · Cereals and bakery products | 13.80% | · Apparel | 5.20% |
| · Meats, poultry, fish, and eggs | 11.70% | · New vehicles | 11.40% |
| · Dairy and related products | 13.50% | · Used cars and trucks | 7.10% |
| · Fruits and vegetables | 8.10% | · Medical care commodities | 3.20% |
| · Non-alcoholic beverages | 11.90% | · Alcoholic beverages | 4.00% |
| · Other food at home | 14.40% | · Tobacco and smoking products | 7.90% |
| Food away from home | 7.70% | Services less energy services | 5.50% |
| · Full service meals and snacks | 8.90% | Shelter | 5.60% |
| · Limited service meals and snacks | 7.40% | · Rent of primary residence | 5.80% |
| Energy Inflation | 41.60% | · Owners’ equivalent rent | 5.50% |
| Energy commodities | 60.60% | Medical Care Services | 4.80% |
| · Fuel oil | 98.50% | · Physician Services | 1.00% |
| · Gasoline (all types) | 59.90% | · Hospital Services | 3.90% |
| Energy services | 19.40% | Transport Services | 8.80% |
| · Electricity | 13.70% | · Motor vehicle Maintenance | 7.90% |
| · Natural gas (piped) | 38.40% | · Motor vehicle insurance | 6.00% |
| Headline Consumer Inflation | 9.10% | · Airline Fare | 34.10% |
Data Source: US Bureau of Labour Statistics
There are two trends that emerge from the table above. Food inflation, especially food at home, continues to be sticky amidst heightened supply chain constraints. The same is the case with energy inflation also, where the gasoline prices have been hiked, transmitting the impact to the end user. Core inflation is marginally lower by 10 bps.
Why high frequency inflation is not too encouraging
The Bureau of Labour Statistics (BLS) reports US inflation on a yoy basis, as well as on a MOM high frequency basis. It looks at inflation for June 2022 over June 2021 and also 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%.
Chart Source: US Bureau of Labour Statistics
The MOM inflation at 1.3% is the highest in the last 13 months and shows a 100 bps spike over April, indicating that global headwinds are just too strong.
Here is what triggered the spike in high frequency inflation in June 2022.
a) Food inflation has spiked month-on-month by 1.0% in June 2022 on top of a 1.2% spike in May 2022. This is the sixth consecutive increase of 1% and above in food inflation.
b) Energy inflation was up month-on-month by 7.5% in June 2022, on top of 3.9% in May 2022. Natural gas spike at 8.2% was the fastest since 2005, while gasoline was up 11.2%.
c) The core inflation was up 0.7% in June on top of 0.6% in May 2022. The rent index witnessed the sharpest MOM rise since April 1986.
In terms of the Fed stance, it looks inevitable that the Fed would be impelled to hike rates by 75 bps in July 2022 FOMC meet. The 50 bps debate may now be put to rest.
Fed will prepare for another 75 bps rate hike in July 2022
Fed has already hiked rates by 150 bps in the last 3 FOMC meetings, taking the effective Fed rate to the range of 1.75% to 2.00%. Of course, the FOMC stance on rates is defined by the PCE (private consumption expenditure) inflation. However, since the PCE inflation would only be announced towards the end of July, the consumer inflation would be used as a proxy. With the spike in inflation, it looks almost inevitable that the FOMC would raise the rates by another 75 bps to the range of 2.50% to 2.75% in the July 2022 meet.
In the last few weeks, the Fed is caught in a dilemma between monetary tightness and the risk of recession. However, with consumer inflation at 9.1%, the Fed is unlikely to take chances. It is now almost a given that a 75 bps rate hike is on the cards. The FOMC may also look to get aggressive on bond book unwinding and even shift to $95 billion a month, sooner rather than later. That will amplify the impact of the rate hikes in controlling inflation. While the recession debate will continue, the FOMC would be more obsessed with bringing inflation under control!
A tale of 2 inflations – India and the US
There are two diverse trends that we get to see in global inflation. In India, the inflation has tapered from 7.79% in April 2022 to 7.01% in June 2022, thanks largely to the aggressively hawkish stance adopted by the RBI. On the other hand, US inflation has been rising despite the hawkish actions and ultra-hawkish noises by the Federal Reserve. That should provide some relief for the RBI in its monetary policy approach.
What will the RBI do when it meets next in August 2022? Indian inflation has remained above 7% so the RBI is unlikely to take chances. A 75 bps rate hike by the Fed in July (and that looks very likely) would prod the RBI to err on the side of caution and hike rates by 40 to 50 bps. The saving grace for India is; inflation is reacting favourably to RBI hawkishness!
US inflation at 41-year high of 8.5% ratifies Fed hawkishness
- India Infoline News Service
- 13 Apr , 2022
- 9:24 AM
After reporting 7.9% inflation in Feb-22, consensus Reuters estimates were already pegging US consumer inflation for Mar-22 at 8.4%. The actual inflation for Mar-22 announced by the Bureau of Labour Statistics (BLS) on 12th April, came in at a 41-year high of 8.5%. For the month of Mar-22, the pressure came from energy prices and higher food prices. Core inflation at 6.5% was also 10 bps higher than Feb-22.
How the US inflation components stacked up in Mar-22
At 8.5%, US consumer inflation is back to the inflation levels of 1981, before Paul Volcker had tightened the screws on liquidity.
Here is a quick inflation summary.
Data Source: US Bureau of Labour Statistics
Clearly, energy inflation at 32% is driving the overall US consumer inflation but food inflation at 8.8% is also fairly high. The core inflation has been stable at 6.5% in Mar-22 but some of its components like airfares, new vehicles and used vehicles are sharply higher. On the energy front, fuel is up 70.1% yoy while gasoline is up 48% yoy. In the food basket, high protein food products appear to be driving inflation on the back of surge in demand.
High frequency inflation is a major challenge for the US
The BLS reports US inflation on a yoy basis, but also reports high frequency inflation on a MOM basis, i.e. rise in inflation index for Mar-22 over Feb22. That figure is influenced by geopolitical risks, commodity prices and other high frequency factors that are currently driving inflation. The sequential inflation in the US throws up interesting stories.
In the US, yoy inflation for Mar-22 came in at 8.5% compared to 7.9% in Feb-22 and 7.5% in Jan-22. From a short term perspective, the sequential spike in inflation was at 1.2% in Mar-22 compared to 0.8% in Feb-22 and just 0.6% in Jan-22. The sequential inflation of 1.2% in Mar-22 is the highest in the last 13 months and references the sharp impact that the war and input costs are having. This will have larger implications for Fed monetary policy.
What triggered 8.5% US inflation in Mar-22?
Bond yields have been rallying in the US, but at 2.75%, the bond yields are way below the inflation rate of 8.5%. This implies huge negative real rates of return. Here is what triggered consumer inflation in the US.
a) Rising energy costs has been the main reason for this spike in consumer inflation. After the energy index rose 3.5% in Feb-22, it spiked by another 11% in Mar-22 on sequential basis. That is where most of the pressure is coming from.
b) Gasoline (petrol equivalent) was the other big driver of inflation. In Feb-22 gasoline prices surge by 6.6% but this was followed by a whopping 18.3% spike in gasoline prices in Mar-22. US gasoline prices are up 48% in last one year.
c) Crude impact is not just about fuel and gasoline. Since oil has strong externalities, it manages to seep into the cost structure of most of the products manufactured or services rendered in the US economy. That is the risk.
d) If you look at the groceries basket in the US, it is up 1.5% on a sequential basis and about 10% on a yoy basis. With the Black Sea blockade already on, the food equations are likely to be impacted. After all, Ukraine remains the bread basket of Europe.
With 8.5% inflation, there may be no Fed rethink
Fed is already prepared for higher inflation this year and the minutes of the March FOMC meeting already highlighted the strategy. After raising the rates by 25 bps in Mar-22, the minutes hint at another 200 bps rate hike in 2022, with rate hikes in each of the remaining six FOMC meetings this year. Such aggression implies a couple of larger rate hikes with the Fed most likely to start off with an aggressive 50 bps rate hike in May.
For now, Fed is clear it will be inflation control above all else. Despite the risks caused by the Ukraine war, Fed refused to budge on its hawkishness. Apart from the aggressive rate hikes this year, Fed is also pencilling in commencement of its bond book unwinding. The $9 trillion Fed bond book will be wound down at the rate of $95 billion per month starting May-22. Fed is going to adopt a mix of dearer money and tighter liquidity to combat US inflation.
What does US inflation number mean for India?
In our previously monthly report on US inflation, we had estimated that if oil and food were the inflation drivers, India too will have to contend with sharply higher inflation. That view has been ratified with India’s Mar-22 inflation coming in at 6.95%. In its April 2022 monetary policy the RBI refused to give up, either on its dovish rate stance or accommodative policy stance. Higher inflation leaves the RBI with a big dilemma.
The maximum that India can now wait is up to May -22 to check if the US Fed really walks its talk on rate hikes and on bond unwinding. If the US Fed sticks to its timetable in May, then the RBI would be running out of time. Then it has to embark on an ultra-hawkish approach in its June monetary policy. Perhaps, RBI may even have to do it earlier!
How the US inflation components stacked up in Mar-22
At 8.5%, US consumer inflation is back to the inflation levels of 1981, before Paul Volcker had tightened the screws on liquidity.
Here is a quick inflation summary.
| Category | Mar-2022 (YOY) | Category | Mar-2022 (YOY) |
| Food Inflation | 8.80% | Core Inflation | 6.50% |
| Food at home | 10.00% | Commodities less food and energy | 11.70% |
|
9.40% |
|
6.80% |
|
13.70% |
|
12.50% |
|
7.00% |
|
35.30% |
|
8.50% |
|
2.70% |
|
8.00% |
|
3.70% |
|
10.30% |
|
6.9% |
| Food away from home | 6.90% | Services less energy services | 4.7% |
|
8.00% | Shelter | 5.0% |
|
7.20% |
|
4.4% |
| Energy Inflation | 32.00% |
|
4.5% |
| Energy commodities | 48.30% | Medical Care Services | 2.9% |
|
70.10% |
|
0.7% |
|
48.00% |
|
3.3% |
| Energy services | 13.50% | Transport Services | 7.7% |
|
11.10% |
|
4.9% |
|
21.60% |
|
4.2% |
| Headline Consumer Inflation | 8.50% |
|
23.6% |
Clearly, energy inflation at 32% is driving the overall US consumer inflation but food inflation at 8.8% is also fairly high. The core inflation has been stable at 6.5% in Mar-22 but some of its components like airfares, new vehicles and used vehicles are sharply higher. On the energy front, fuel is up 70.1% yoy while gasoline is up 48% yoy. In the food basket, high protein food products appear to be driving inflation on the back of surge in demand.
High frequency inflation is a major challenge for the US
The BLS reports US inflation on a yoy basis, but also reports high frequency inflation on a MOM basis, i.e. rise in inflation index for Mar-22 over Feb22. That figure is influenced by geopolitical risks, commodity prices and other high frequency factors that are currently driving inflation. The sequential inflation in the US throws up interesting stories.
Chart Source: US Bureau of Labour Statistics
In the US, yoy inflation for Mar-22 came in at 8.5% compared to 7.9% in Feb-22 and 7.5% in Jan-22. From a short term perspective, the sequential spike in inflation was at 1.2% in Mar-22 compared to 0.8% in Feb-22 and just 0.6% in Jan-22. The sequential inflation of 1.2% in Mar-22 is the highest in the last 13 months and references the sharp impact that the war and input costs are having. This will have larger implications for Fed monetary policy.
What triggered 8.5% US inflation in Mar-22?
Bond yields have been rallying in the US, but at 2.75%, the bond yields are way below the inflation rate of 8.5%. This implies huge negative real rates of return. Here is what triggered consumer inflation in the US.
a) Rising energy costs has been the main reason for this spike in consumer inflation. After the energy index rose 3.5% in Feb-22, it spiked by another 11% in Mar-22 on sequential basis. That is where most of the pressure is coming from.
b) Gasoline (petrol equivalent) was the other big driver of inflation. In Feb-22 gasoline prices surge by 6.6% but this was followed by a whopping 18.3% spike in gasoline prices in Mar-22. US gasoline prices are up 48% in last one year.
c) Crude impact is not just about fuel and gasoline. Since oil has strong externalities, it manages to seep into the cost structure of most of the products manufactured or services rendered in the US economy. That is the risk.
d) If you look at the groceries basket in the US, it is up 1.5% on a sequential basis and about 10% on a yoy basis. With the Black Sea blockade already on, the food equations are likely to be impacted. After all, Ukraine remains the bread basket of Europe.
With 8.5% inflation, there may be no Fed rethink
Fed is already prepared for higher inflation this year and the minutes of the March FOMC meeting already highlighted the strategy. After raising the rates by 25 bps in Mar-22, the minutes hint at another 200 bps rate hike in 2022, with rate hikes in each of the remaining six FOMC meetings this year. Such aggression implies a couple of larger rate hikes with the Fed most likely to start off with an aggressive 50 bps rate hike in May.
For now, Fed is clear it will be inflation control above all else. Despite the risks caused by the Ukraine war, Fed refused to budge on its hawkishness. Apart from the aggressive rate hikes this year, Fed is also pencilling in commencement of its bond book unwinding. The $9 trillion Fed bond book will be wound down at the rate of $95 billion per month starting May-22. Fed is going to adopt a mix of dearer money and tighter liquidity to combat US inflation.
What does US inflation number mean for India?
In our previously monthly report on US inflation, we had estimated that if oil and food were the inflation drivers, India too will have to contend with sharply higher inflation. That view has been ratified with India’s Mar-22 inflation coming in at 6.95%. In its April 2022 monetary policy the RBI refused to give up, either on its dovish rate stance or accommodative policy stance. Higher inflation leaves the RBI with a big dilemma.
The maximum that India can now wait is up to May -22 to check if the US Fed really walks its talk on rate hikes and on bond unwinding. If the US Fed sticks to its timetable in May, then the RBI would be running out of time. Then it has to embark on an ultra-hawkish approach in its June monetary policy. Perhaps, RBI may even have to do it earlier!
US inflation surges to 9.1%, the highest level in 41 years
- India Infoline News Service
- 14 Jul , 2022
- 8:32 AM
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The BLS reports US inflation on a yoy basis, but also reports high frequency inflation on a MOM basis, i.e. rise in inflation index for Mar-22 over Feb22.
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