God save America; US inflation surges to 9.1% for June 2022

14 Jul 2022 , 08:58 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.

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!