US inflation remains sticky at 8.3% for April 2022

12 May 2022 , 11:14 AM

After reporting 7.9% inflation in February 2022 and 8.5% in March 2022, the Reuters consensus estimate had pegged the US April 2022 inflation at 8%. However, actual consumer inflation for April 2022 came in 30 bps higher at 8.3%. While fuel inflation did taper as anticipated, food inflation surged and offset the advantage of lower fuel inflation. Core inflation at 6.2% was 30 bps lower than the corresponding figure for March 2022.

How the US inflation components stacked up in April 2022

 The US consumer inflation for April 2022 at 8.3% was lower than March 2022. However, it is still higher than the consensus estimates. Fuel inflation and core inflation did taper over last month but food inflation was sharply higher. Check the table below.

Category	Apr 2022 (YOY)	Category	Apr 2022 (YOY)
Food Inflation	9.40%	Core Inflation	6.20%
Food at home	10.80%	Commodities less food and energy	9.70%
Cereals and bakery products	10.30%	Apparel	5.40%
Meats, poultry, fish, and eggs	14.30%	New vehicles	13.20%
Dairy and related products	9.10%	Used cars and trucks	22.7%
Fruits and vegetables	7.80%	Medical care commodities	2.10%
Non-alcoholic beverages	9.80%	Alcoholic beverages	3.90%
Other food at home	11.00%	Tobacco and smoking products	7.20%
Food away from home	7.20%	Services less energy services	4.90%
Full service meals and snacks	8.70%	Shelter	5.10%
Limited service meals and snacks	7.00%	Rent of primary residence	4.80%
Energy Inflation	30.30%	Owners’ equivalent rent	4.80%
Energy commodities	44.70%	Medical Care Services	3.50%
Fuel oil	80.50%	Physician Services	1.20%
Gasoline (all types)	43.60%	Hospital Services	3.60%
Energy services	13.70%	Transport Services	8.50%
Electricity	11.00%	Motor vehicle Maintenance	5.30%
Natural gas (piped)	22.70%	Motor vehicle insurance	4.40%
Headline Consumer Inflation	8.30%	Airline Fare	33.30%

Data Source: US Bureau of Labour Statistics

Energy inflation at 30.3% is lower than 32% in March 2022, but specific items like fuel oil are sharply higher over last month. But the real problem came from food inflation which at 9.40% in April 2022 is 60 bps higher than the corresponding figure in March 2022. The core inflation has come in 30 bps lower at 6.2% in April 2022 but some of its components like airfares and transport services have trended higher even as new vehicles and used vehicles have tapered. On the energy front, fuel is up 80.50% yoy; more than 10 percentage points above March. Gasoline has tapered by more than 4 percentage points to 43.60% in April 2022. In the food basket, high protein food products, and especially, the food at home, appears to be driving inflation on the back of surge in demand.

For a change, high frequency inflation tapered in April 2022

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 April 2022 over March 2022. That figure is influenced by geopolitical risks, commodity prices and other high frequency factors. The sequential inflation story looks relatively better in April 2022.

Chart Source: US Bureau of Labour Statistics

From a short term perspective, the sequential increase in inflation fell sharply to 0.3% in April 2022 from 1.2% in March 2022. In fact, the uptrend in MOM inflation, which began in January 2022, has been arrested in April 2022. The sequential inflation of 0.3% in April 2022 was last seen in August 2021 and is the lowest level in 13 months.

What triggered 8.3% US inflation in April 2022?

Bond yields, at well above 3%, are still way below the inflation rate of 8.3%. This implies huge negative real rates of return. Former Treasury Secretary, Larry Summers, has indicated that the US Fed may have been a bit too languid in raising rates. It also implies that the Fed is likely to move much faster in the coming FOMC meetings. Here is what influenced sequential consumer inflation in the US in April 2022.

1. Month on month, energy costs declined in April 2022 by -2.7%. This compares favourably with 11% in March 2022 and 3.5% in February 2022. The pressure from fuel prices has clearly abated, especially gasoline prices.
2. Gasoline (petrol equivalent) was the big driver of lower inflation in April 2022 contracting -6.1% month-on-month. It was 18.3% in March 2022 and 6.6% in February 2022. US gasoline prices are up 43.6% yoy.
3. Crude impact is not just about fuel and gasoline. Oil has strong externalities and seeps into the cost structures of most of the products manufactured and services rendered in the US economy. That is the concomitant risk.
4. If you look at the groceries basket in the US, the month on month increase in dairy products was 2.5%, the highest sequential spike since July 2007. Even other high protein diets like meat and eggs rose by 1.4% sequentially.

Fed hawkishness looks almost inevitable now

The Fed has already raised rates by 25 bps in March and after the March 2022 inflation at 8.5%, it raised rates by another 50 bps in May. The repo rates have effectively moved up from 0.00%-0.25% range to 0.75%-1.00% range in last 3 months. The Fed has already guided that it will raise the Fed rates by another 175 to 200 bps before the end of 2022 taking the Fed rates to around 3%. That is a lot of hawkishness. The latest April 2022 inflation number will only reaffirm the view of the Fed that an ultra-hawkish stance is the only answer.

In the May 2022 Fed meet, it also 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 will amplify the impact of the rate hikes in controlling inflation. Of course, sceptics argue that these rate hikes may not be effective since inflation is too high and unemployment is too low. However, we have to await further data flows.

How will the US inflation number impact India?

India CPI inflation touched 6.95% in March 2022 and April 2022 inflation number is expected at 7.5%. We await the announcement on 12th May. But the RBI has already pre-empted this risk by making an unscheduled rate hike of 40 basis points in May 2022, amplified by a 50 bps increase in CRR. However, if the Fed walks its talk on rates, then the RBI may not have much choice but to be more aggressive. If not anything else, that should at least stem the selling in the Indian rupee. For now, dollar strength is the global paradigm!