Lower oil prices pulls down July 2022 US consumer inflation to 8.5%

  • India Infoline News Service
  • 11 Aug , 2022
  • 7:40 AM
The YOY inflation came down by 60 bps in July 2022 to 8.50% compared to the 41-year high of 9.1% in June 2022. The pre-inflation surveys had already hinted at tapering of inflation and the first signals are evident in the July inflation figure.

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, 8.6% in May 2022 and 9.1% in June 2022. For a change, the consumer inflation in July 2022 tapered by 60 bps to 8.5%, as an outcome of hawkish measures.

Chart Source: US Bureau of Labour Statistics

There were two diverse trends visible in the inflation basket in the month of July. The headline food inflation rose by 50 basis points from 10.40% in June to 10.90% in July 2022. However, this was more than offset by a sharp fall in the energy inflation, which fell by more than 800 basis points in July 2022 compared to the energy inflation levels in June. The sharp fall in energy inflation was largely driven by lower prices of fuel oil, gasoline and natural gas. In the food basket, it is the Food at Home category that experienced the biggest spike in inflation. Most of the nutrition essentials have seen higher prices. For a change, the core inflation (net of food and fuel) was static at 5.9% in July 2022.

Energy the show stopper; but food inflation the show spoiler

While headline consumer inflation may have fallen 60 bps from 9.1% to 8.5% yoy, the July 2022 inflation is still above the median inflation witnessed in the 3 months prior to June. There has been a sharp fall in crude oil prices globally and that is reflected in the 800+ bps fall in energy inflation in July. However this is a rather ephemeral gain to rely on, since Brent Crude has fallen below $100/bbl, purely on recession fears. In absolute terms, all the 3 components of the inflation basket are well above their 5 year median levels.

Category July 2022 (YOY) Category July 2022 (YOY)
Food Inflation 10.90% Core Inflation 5.90%
Food at home 13.10% Commodities less food and energy 7.00%
·         Cereals and bakery products 15.00% ·         Apparel 5.10%
·         Meats, poultry, fish, and eggs 10.90% ·         New vehicles 10.40%
·         Dairy and related products 14.90% ·         Used cars and trucks 6.60%
·         Fruits and vegetables 9.30% ·         Medical care commodities 3.70%
·         Non-alcoholic beverages 13.80% ·         Alcoholic beverages 4.20%
·         Other food at home 15.80% ·         Tobacco and smoking products 7.70%
Food away from home 7.60% Services less energy services 5.50%
·         Full service meals and snacks 8.90% Shelter 5.70%
·         Limited service meals and snacks 7.20% ·         Rent of primary residence 6.30%
Energy Inflation 32.90% ·         Owners’ equivalent rent 5.80%
Energy commodities 44.90% Medical Care Services 5.10%
·         Fuel oil 75.60% ·         Physician Services 0.80%
·         Gasoline (all types) 44.00% ·         Hospital Services 3.90%
Energy services 18.80% Transport Services 9.20%
·         Electricity 15.20% ·         Motor vehicle Maintenance 8.10%
·         Natural gas (piped) 30.50% ·         Motor vehicle insurance 7.40%
Headline Consumer Inflation 8.50% ·         Airline Fare 27.70%
Data Source: US Bureau of Labour Statistics

There are two trends that emerge from the food basket analysis above. Food inflation, especially food at home, continued to surge and the overall spike of 50 bps in food inflation can be a cause for concern. Clearly, supply chain constraints are hitting the food basket hardest.

While energy inflation is sharply lower, most experts expect the retail gasoline prices in the US to again surge to record highs, pulling up energy inflation in coming months.

What did we read from high frequency inflation numbers?

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 July 2022 over July 2021 and also over June 2022. The high frequency inflation has plummeted from a high of 1.3% in June 2022 to a yearly low of 0.0% in July 2022. But how does the overall basket look on a MOM basis?

Chart Source: US Bureau of Labour Statistics

MOM (high frequency) inflation has fallen from a high of 1.3% to a low of 0.0%, hinting at aggressive rate hikes delivering the goods for the Fed. However, even the MOM fall in inflation was largely due to energy prices.

a)      Food inflation remains a pain point. It spiked 1.1% MOM in July 2022, on top of a 1.0% spike in June 2022 and a 1.2% spike in May 2022. This is the seventh consecutive increase of 1% and above in food inflation.

b)      Energy inflation was down month-on-month by 4.5% in July 2022, reversing the trend of the last 2 months. While electricity was higher MOM, oil and gas prices fell sharply.

c)      The core inflation was up 0.3% in July 2022 on top of 0.7% in June and 0.6% in May 2022. Other than airline fares and apparel, all other items of core inflation are up MOM.

So, what does this mean for the Fed stance, in its remaining 3 FOMC meets in 2022?

Fed may go slow on rate hikes, but hawkishness stays

Since March 2022, Fed has hiked rates by 225 bps and brought the Fed rates to the neutral level of 2.25% to 2.50%. While the Fed will look to front-load most of the rate hikes in 2022, it will be a little more watchful and data-driven, now that the neutral rate has been reached. However, the fact remains that food inflation remains sticky and the headline inflation is still miles away from the Fed target of 2%.

However, the Fed has the luxury of more data points ahead of the September 2022 FOMC meet including updated numbers on GDP, jobs, headline inflation, productivity etc. The July productivity report shows that US wages were rising even as manufacturing productivity has been falling. That is hardly sustainable and the Fed would look at more hawkishness to correct this anomaly.  Hawkishness stays, but perhaps a bit toned down!

What does 8.5% US inflation mean for India?

There something similar about the Indian and the US economic situations. Both have hiked rates aggressively from post-COVID lows. However, in both cases the inflation has remained sticky. The other similarity is that both economies have reached the pre-COVID interest rate levels and from here on, any hawkishness will come at the cost of economic growth. However, the Indian economy still has the comfort of sharply higher GDP growth to savour.

What will the RBI do when it meets next in October 2022? If you read the language of the August policy, there are 2 things that emerge.

Firstly, RBI is taking a hard-nosed stance to cut inflation. Secondly, it is also attacking liquidity and one of the themes of recent policy announcements has been the winding up of accommodation. US inflation in July 2022 at 8.5% means that the Fed has a long hard battle on hand. Till then, the RBI has to stay on the same side to avoid the risk of monetary divergence. That surely has a cost!
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Key takeaways from the Jerome Powell testimony

  • India Infoline News Service
  • 24 Jun , 2022
  • 2:11 PM
When the Fed concludes its bi-monthly FOMC meet, the Fed statement and the Fed minutes are important documents. One more thing that has a strong bearing on market sentiments is the testimony of the chair. Normally, the Fed chairperson testifies before the Senate and later in front of the Congress. On 22nd June, Jerome Powell completed his testimony before the Senate and the Congress testimony is scheduled for 23rd June. However, it is the Senate testimony that actual contains key insights into the thinking of the Fed.

Major takeaways from Jerome Powell’s Senate testimony

Here is what manifests when you read between the lines of the Senate testimony of Jerome Powell on 22nd June.
  1. One thing is clear that the Fed remains committed to bringing inflation back to the 2% level, albeit in phases. The testimony also underlines the fact that they would like to hike rates as quickly as possible, implying a lot of front loading.
  2. Powell has clarified in his testimony that the Fed would continue to be data driven and no projection or estimate was cast in stone. Hence future rate increases and any reversal would be entirely dependent on the flow of key macro data.
  3. In other words, Powell has clarified that the markets cannot treat either the Fed statement or the dot plot chart or even the Fedwatch probabilities as reflective. They were at best indicative and would be decided meeting by meeting.
  4. Low inflation was not only essential to keep cost of production low but also to ensure that the people of the US actually enjoyed the full benefits of higher wages. Letting the higher wage benefits get frittered away by higher inflation, defeated the purpose.
  5. Fed focuses on PCE (personal consumption expenditure) inflation rather than on the consumer inflation. The PCE inflation has pegged the core inflation at 4.9% for June 2022 in the direction of pushing headline inflation closer to 2% by end of 2023.
  6. Powell has suggested that the inflation was likely to be aggravated by secular supply chain constraints, Russian invasion of Ukraine,China lockdowns etc. However, the good news, as emanating from the Powell testimony, was that real GDP had picked up even amidst rising inflation since consumer spending had remained strong and robust.
  7. Onwhether rate hikes were working; early indications were positive according to Powell. The growth in fixed investments were slowing while the housing sector was softening due to high mortgage rates. Tightening of financial conditions was surely helping the US economy to balance demand and supply.
  8. Powell pointed to the huge gap between strong labour demand and tepid labour supply, when labour force participation had hardly changed in 5 months. This will keep wage hikes at elevated levels and continue to push consumer demand. It also partially neutralizes the inflation battle.
  9. Powell has specifically mentioned in his testimony that the Fed would continue to communicate its thinking in crystal clear terms. Because of clear communication, the financial conditions had significantly tightened as it reflected the actions taken by the Fed so far and the actions that markets were expecting the Fed to take.
  10. Finally, Fed will remain flexible enough to adapt to the changed conditions at short notice. For now, inflation has hardened more than expected, so the Fed was focussing on front loading its tightening measures. However, this could transform quickly if the signals are of a slowing economy.
The gist of the testimony was that the US economy was strong enough to handle tighter monetary policy without sacrificing growth. However, “Soft Landing” has always been a great idea on paper, but rarely works in practice.

Have the tools and the resolve too

In any big macroeconomic battle, addressing the problem is not just about having the tools and the strategies but also the intent and the resolve to stick to a tough path. That was the overarching message of Jerome Powell in his Senate testimony. Powell summed it up best, “We are strongly committed to bringing inflation down, and we are moving expeditiously. We have the tools we need and the resolve it will take to restore price stability”.

Here is the macroeconomic backdrop to the Fed approach on this subject.
  • Inflation was sharply above the Fed’s longer-term goal of 2%. For April 2022, the PCE inflation stood at 6.3%while the core PCE inflation stood at 4.9%. According to Powell, the broad basing of inflation in the last few months was due to the Ukraine war, which led to a surge in the price of crude oil. Due to its strong externalities, this resulted in inflation across manufacturing and services.
  • Fed has already abandoned the use of the word “Transitory” to describe inflation hinting that lofty oil prices and the COVID-related lockdowns in China could only exacerbate the ongoing supply chain disruptions. The US being a net importer with a huge trade deficit, faces heavy imported inflation.
  • There are two issues about growth; rather contrasting. Real GDP growth picked up this quarter as consumption spending remaining strong. Growth in fixed investment is slowing and activity in the housing sector softening due to higher mortgage rates. Hopefully, the tightening in financial conditions should temper growth and help bring demand into better balance with supply; without disrupting long term growth cycles.
Amidst all this chaos and diverse pulls, the labour market continues to remain robust.

Need for an adaptive monetary policy

Powell highlighted that the current situation was a battle of imponderables. Fed had to tighten without disrupting its goal of maximum employment. High inflation is already putting strain on vulnerable sections of society and tightening may be worsening it. Therefore, Powell has spoken about an adaptive monetary policy.

An adaptive policy may be tough in the short term but tries to ensure a soft landing in the medium term. It also has goal of fostering maximum employment and sustaining growth, while trying to control inflation. The idea of an adaptive policy is to keep the approach flexible, ready to modify at short notice and with equal aggression in the other direction. As Powell summed up, monetary policy outcomes rarely evolve the way you want it to.

To capture the gist of Powell’s adaptive thrust, it is a choice between the giraffe and the dinosaur. The one that adapted better survived.


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  • 24 June, 2022 |
  • 9:31 AM

Federal Reserve remains committed to bringing down inflation to 2% level

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  • IIFL News Service |
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