The US economy had reported consumer inflation at 7.9% in February 2022 and 8.5% in March 2022. In April 2022, the actual inflation came in at 8.3% against the consensus estimate of 8%. Similarly, in May 2022, the actual consumer inflation came in 30 bps higher than consensus at 8.6%.
The increase in inflation was broad-based with the indexes for shelter, gasoline and food being the major contributors to the spike in consumer inflation in the US in May 2022. The 8.6% spike in consumer inflation in May 2022, is the highest level of inflation recorded since December 1981. The energy index spiked 34.6% and this is the highest yearly spike since September 2005. There were more records as food inflation at 10.1% is the first double-digit spike in food inflation since March 1981. Consumer inflation, is playing hard ball.
US consumer inflation in May 2022 and the basket story
The US consumer inflation had fallen in April 2022 to 8.3% but has again bounced back to 8.6% in May 2022. While the core inflation (net of food and energy) tapered on a yoy basis, there was a spike in food and energy inflation in May 2022. Check the table below.
Category | May 2022 (YOY) | Category | May 2022 (YOY) |
Food Inflation | 10.10% | Core Inflation | 6.00% |
Food at home | 11.90% | Commodities less food and energy | 8.50% |
· Cereals and bakery products | 11.60% | · Apparel | 5.00% |
· Meats, poultry, fish, and eggs | 14.20% | · New vehicles | 12.60% |
· Dairy and related products | 11.80% | · Used cars and trucks | 16.10% |
· Fruits and vegetables | 8.20% | · Medical care commodities | 2.40% |
· Non-alcoholic beverages | 12.00% | · Alcoholic beverages | 4.00% |
· Other food at home | 12.60% | · Tobacco and smoking products | 7.90% |
Food away from home | 7.40% | Services less energy services | 5.20% |
· Full service meals and snacks | 9.00% | Shelter | 5.50% |
· Limited service meals and snacks | 7.30% | · Rent of primary residence | 5.20% |
Energy Inflation | 34.60% | · Owners’ equivalent rent | 5.10% |
Energy commodities | 50.30% | Medical Care Services | 4.00% |
· Fuel oil | 106.70% | · Physician Services | 1.10% |
· Gasoline (all types) | 48.70% | · Hospital Services | 3.90% |
Energy services | 16.20% | Transport Services | 7.90% |
· Electricity | 12.00% | · Motor vehicle Maintenance | 6.10% |
· Natural gas (piped) | 30.20% | · Motor vehicle insurance | 4.50% |
Headline Consumer Inflation | 8.60% | · Airline Fare | 37.80% |
Data Source: US Bureau of Labour Statistics
There are broadly two trends that emerge from the table above. Food inflation continues to be sticky with heightened supply chain constraints. The same is the case with energy inflation also, where prices of crude have once again spiked amidst the uncertainty of Ukraine war. The only saving grace has been the fall in core inflation.
A closer look at high frequency inflation in May 2022
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 May 2022 over May 2021 and over April 2022. The high frequency MOM inflation for the month of May 2022 has shown a sharp spike as shown in the chart below.
Chart Source: US Bureau of Labour Statistics
From a short term perspective, the sequential increase in inflation bounced sharply from 0.3% in April 2022 to 1% in May 2022. This almost negates the entire fall in MOM inflation in the month of April 2022. In the last 13 months, the MOM high frequency inflation has been above 1% only twice; i.e. in the month of March 2022 and May 2022. The short term pressure on inflation is surely showing up.
Short term inflation triggers and what it means?
Here is what triggered a spike in high frequency inflation in May 2022.
a) Food inflation has spiked month-on-month by 1.2% on top of a 0.9% spike in April 2022. Food prices are driving a lot of short term inflation amidst supply chain issues.
b) Energy inflation was up month-on-month by 3.9%. The spike was sharpest in natural gas and gasoline followed by electricity.
c) In the core inflation basket, the shelter index was up 0.6%, the highest spike since March 2004 as the rental index also spiked higher.
To cut a long story short, this is only likely to sharpen the Fed hawkish outlook and its trajectory on rate hikes.
Fed hawkishness looks almost inevitable now
Since rate hikes began in 2022, the Fed has hiked rates by 25 bps in March and another 50 bps in May 2022. Effectively, the repo rates are up 75 bps from the range of 0.00%-0.25% to 0.75%-1.00%. Even before May inflation was announced, Fed had already targeted interest rates at around 3% by the end of calendar 2022. That implies a rate hike of another 200 bps in the remaining Fed meetings. However, with May inflation coming in at 8.6%, it shows that nominal rate hikes are not working. What then could the Fed do?
One thing that now looks very likely is a 75 bps rate hike in its next Fed meeting that concludes on 15th June. That would be a clear signal to the market that the Fed wants to compress the negative real rate at the earliest. In May 2022 Fed meet, Fed had announced unwinding of its bond book by $47.50 billion a month from June 2022 onwards. It will be scaled up to $95 billion a month by September 2022. That would amplify the impact of the rate hikes in controlling inflation. Whether these measures will be really efficacious, only time will tell!
What does US May inflation mean for Indian economy?
India CPI inflation touched a multi-year high of 7.79% in April 2022. The May CPI inflation is expected to taper to 7.1% on a higher base. However, consensus estimates have been consistently wrong in recent months. The June CPI inflation announcement will be a critical data point for the RBI monetary game plan going ahead.
RBI has already pre-empted the monetary divergence risk by hiking repo rates by 40 basis points in May 2022 and another 50 bps in June 2022. In addition, it has also amplified its anti-inflation campaign with a 50 bps CRR hike. The big question for the RBI is whether the Fed will actually act as hawkish as it claims. Or, will growth and recovery considerations force a rethink? Either ways, the RBI is well prepared now and that is the good news for India.
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