OVERVIEW: US CPI Inflation Bounces Again But Won’t Change Fed’s Transitional View
NEW YORK (CIHI) – Headline inflation in the United States, as measured by the Consumer Price Index (CPI), jumped again in May, but the US Federal Reserve is unlikely to think that the current high level of inflation is transitory.
The US CPI in May rose 0.6% from April on a seasonally adjusted basis, and was up 5.0% from a year ago, beating consensus expectations. The core CPI, which excludes food and energy, rose 3.8% year on year, the highest since 1992.
Normally, with this type of print, you would expect yields on US government debt to skyrocket. But the answer was the opposite. The 10-year Treasury yield actually fell to around 1.46%, remaining well below the high of 1.77% reached on March 30 when inflation fears generalized.
The market seems to explain the strong CPI figure as an anomaly. Prices for used cars and trucks jumped 7.3% in May from April and 29.7% from a year ago. This component alone accounted for about a third of the month-over-month increase.
Prices for new cars and trucks rose 1.6% more modestly but still robust in May from April, and 3.3% from a year ago.
Obviously, the demand for automobiles is greater than the supply, which is well documented with the global semiconductor shortage limiting production and leading to ultra-low inventories. As of June 1, US auto dealer inventories fell to a record 23 day supply from the normal 65 day level.
These low stocks cause an increase in the demand for used cars. However, that should ease in the second half.
While automaker GM expects some factories in North America, Asia and South America to continue to be hit by the semiconductor shortage in June and July, it plans to resume production in other factories and to increase shipments to dealers in the second half of the year as the global semiconductor supply recovers.
Certainly, we’ve seen inflation on the chemicals side, accelerated by the US winter storm in mid-February that halted production for weeks and months, tightening supply chains around the world. Combine that with already low stocks heading into 2021 and sea container dislocations amid a historic reopening of economies, and you have a recipe for higher prices all around.
The ICIS Global Petrochemical Index (IPEX)
increased 3.6% in May to 223.8, led by a 9.3% increase in Northwestern Europe and an 8.2% increase in the Gulf of the United States. Year after year, IPEX has almost doubled.
It is clear that some of the increases in chemicals prices will be transient as US production continues to rise and inventories recover.
EVERYTHING ON THIS BASIS
Inflation is there and the debate as to whether it is transitory is raging. However, it should be noted that year-over-year comparisons are being skewed by the coronavirus pandemic. As of May 2020, the United States was in essentially full lockdown as infections spread rapidly.
Prices have been unusually depressed in 2020, from air fares to clothing to fuel. Like a June 6 Wall Street Journal article titled
“The Fed’s view on inflation is based on this basis” pointed out, a more meaningful comparison would be to measure inflation today versus before the 2019 pandemic, and keep in mind that this is done over a two-year period.
Applying such an analysis to May, the US CPI has generated a 5.1% gain over two years since May 2019, for a compound annual growth rate (CAGR) of 2.5% – still above The Fed’s 2% inflation target but not too worrying.
The Fed has indicated that it will allow inflation to exceed its 2% target “for a while” after periods when it has fallen below that level.
In addition, the 5.1% gain in the CPI over the two-year period falls within the 10-year range of these gains of 0.8% to 5.8% (in 2012), although ‘up.
It’s no surprise that the United States is experiencing higher inflation, given the $ 5 billion in fiscal stimulus approved along with a near-zero interest rate policy by the Fed. An infrastructure stimulus plan would add fuel to the fire.
INCOME INEQUALITY, UNEMPLOYMENT OF MINORITIES
However, the Fed will likely be patient in terms of interest rate policy, as it seeks to maximize employment exiting the pandemic and foster a full and inclusive economic recovery. This last point in particular will play a role in Fed policy.
Beyond its usual focus, the Fed, chaired by Jerome Powell, has spoken out on social issues – income inequality and minority unemployment in particular. The Fed is monitoring unemployment for blacks and Hispanics, as well as low-wage workers.
“When we think of maximum employment in particular, we are looking at individual groups, such a high unemployment rate in a particular racial group like African Americans… September 16, 2020 in an interview with Bloomberg.
In May 2021, the unemployment rate in the United States was 5.8%, down from 13.3% in May 2020, near the peak of pandemic lockdowns, but still well above the 3.7% before the pandemic of May 2019.
Black / African American unemployment in May 2021 was much worse than average at 9.1% – down from 16.7% in May 2020 but also much higher than 6.2% before the May pandemic 2019. Hispanic / Latino unemployment at 7.3% is also above the overall average, according to the US Bureau of Labor Statistics.
The Fed won’t be forced to raise interest rates with minority unemployment rates this high. On the contrary, he will be patient, leaving the inflation hot for a period, especially if he thinks the high levels are transient.
EYES ON WAGE INFLATION
In the overall inflation equation, economists keep a close watch on wage gains because they tend to be much more rigid than commodity price spikes.
In May 2021, the average hourly wage was up 1.9% from a year ago, with leisure and hospitality wages up 3.7%. And since May 2019, before the pandemic, overall wage gains were 9.0% over two years, for a CAGR of 4.4%.
Economists may be more concerned about wage inflation than the Fed, which would likely like to see solid gains in wages, especially on the lower end.
“We can indirectly affect income inequality by doing what we can to support job creation in the lower end of the market,” Fed Chairman Powell said in testimony before the Senate Committee on February 13. banks.
Today the employment picture is skewed by the additional $ 300 per week in enhanced unemployment benefits provided by the federal government in conjunction with the states. While the program is due to end in September, half of U.S. states have chosen to end it earlier – in June and July – citing it as a drag on work.
Companies complained about labor shortages and had to pay higher wages and bonuses to attract workers, effectively competing with the US government. However, as these improved unemployment benefits disappear, wage pressures may ease.
There is no doubt that inflation is there – in food, energy, materials, goods, housing and wages – and it could last for some time. However, the current high level of inflation may well be transitory, and the Fed will take its time to see if this scenario holds true.
Preview article by Joseph chang
The thumbnail image shows US dollars. Photo by Shutterstock