U.S. prices continue to rise, increasing inflation risks, attracting attention
In recent months, the price index of some countries, including the United States, has continued to rise, and some have risen to decades of highs. People from all walks of life have asked whether the price index will continue to rise for a long time in the future, and whether the rebound will remain large and sustained. There are different opinions on whether the rising prices will trigger inflation and other issues. There will be more attention to when the Federal Reserve's interest rate meeting will send a clear signal of normalization of monetary policy.
The U.S. price index rebounded rapidly
The US Consumer Price Index (CPI) rose strongly in May, up to 5%, higher than April’s 4.2%; core CPI also rose by 3.9%, higher than April’s 3%, a 29-year high. US Consumer News and Business Channel (CNBC) reported that the CPI in May was only 5.3% lower than in August 2008. In addition, the personal consumption expenditure price index (PCE) in April rose by 3.6% year-on-year, which is also the highest level in 13 years. PCE exhibits lower volatility and is therefore more valued by the Fed.
It is reported that the main driving force of the US price increase in May was partly due to the lower base effect last year. In May last year, the US economy was severely impacted by the new crown pneumonia epidemic. This is basically similar to the reason for the rapid rise in the US CPI in April.
According to the analysis of Agence France-Presse, the increase in CPI in the United States in May was mainly due to the base effect, especially the energy factor. Among them, second-hand car and energy prices contributed the most to price increases, increasing by 29.7% and 28.5% year-on-year respectively. The British "Financial Times" and Agence France-Presse reported that the increase in used car prices contributed one-third of the month's CPI increase.
The “Financial Times” also quoted the opinion of Casey Bostjanhis, chief U.S. economist at Oxford Economics, saying that the inflation data this time is mainly due to a strong base effect, which will be expected in the next few months. Tends to weaken.
However, the prices of various sub-factors generally rose in May, which promoted the overall increase in prices. The prices of food, furniture, clothes, and air tickets all rose to varying degrees.
Data released on June 15 show that the US May Producer Price Index (PPI) data and core PPI data were 6.6% and 4.8%, respectively. The May retail sales data released on the same day showed that due to the drag of auto sales, May retail sales fell by 1.3% year-on-year, highlighting the multiple impacts of supply chain bottlenecks.
Inflation risk views are still divergent
Opinions on whether the continuous rise of the U.S. price index will bring inflation risks are still quite divided.
Market Watch quoted economist Ben Ayres as saying that the May CPI data may have reached its peak and will gradually fall back to pre-epidemic levels in the next few months. Bill Adams, a senior economist at PNC Financial Services, believes that the service of consumer spending in certain areas is faster than the recovery of labor productivity, thus temporarily pushing up inflation. CNBC cited the opinion of a senior economist at AllianceBernstein that the inflation spike is temporary, even if it is more dramatic than most forecasters initially expected.
The Financial Times reported that since the early 1980s, inflation has not been a major threat to the U.S. economy. The Fed basically dismissed these numbers. Fed officials believe that the current rise is due to some temporary factors, which will weaken over time. In the same period last year, many economic activities were still restricted due to preventive measures against the epidemic. In addition, the Biden administration is trying to persuade Congress to pass more than $4 trillion in additional spending in the next 10 years. Officials of the administration also believe that as the economy recovers, inflation is expected to rise next year, but it will not get out of control.
However, some economists and many Republican lawmakers believe that the Fed has underestimated the risk of increased inflation.
Former U.S. Treasury Secretary Larry Summers has constantly sounded the inflation alarm. He has strongly criticized U.S. fiscal and monetary policies. Summers said: "If the U.S. economy overheats and eventually the Fed or the market drives interest rates to soar, the already fragile and overly leveraged global economy will face huge risks."
Bobst Jansis of the Oxford Economics Institute prudently stated that price increases due to economic restart and supply chain bottlenecks may lead to higher inflation. Since the imbalance of supply and demand can only be gradually resolved, these factors have caused Rising prices will be more difficult to resolve.
It is estimated that the Bloomberg Commodity Index has risen by nearly 25% this year, which is more than 60% higher than the April 2020 low. Some commodities have risen even more staggeringly: copper prices have risen by 125% from the March 2020 low; Brent crude oil has risen by nearly 280% from the April 2020 low of just under US$20 a barrel. In the next stage, as the economy restarts and travel bans are relaxed, the rebound in service demand is likely to push up service industry prices to pre-epidemic levels.
Therefore, market traders are still paying attention to the fact that this rising price pressure is the beginning of a sustainable trend, and it is only a “temporary phenomenon” driven by the restart of economic activities, the base effect and the temporary interruption of the supply chain.
The market pays attention to the direction of the Fed’s policy
The U.S. CPI in April once helped the 10-year U.S. Treasury yield to rise to 1.7% in mid-May, and remained in the 1.6%-1.7% range for a period of time. However, after the release of the non-agricultural employment report that fell short of expectations in early June, the current round of U.S. bond yields declined. As of June 10, it has fallen by about 30 basis points from the previous high.
Before mid-February this year, the rapid rise in U.S. bond interest rates was mainly driven by the rebound in inflation expectations. After the epidemic, the U.S. economy has accelerated its recovery, combined with several rounds of large-scale fiscal stimulus promoted by the Biden administration, and inflation expectations have been rising. Since then, as inflation expectations tend to ease, the replacement of inflation expectations by real interest rates has become the core factor driving the volatility of U.S. Treasury interest rates. At that time, the market focused more on the improvement of economic data. Implied inflation expectations have fallen by 19 basis points from the May peak. This is in sharp contrast to the two consecutive months of sharp increases in the CPI, showing that investors’ concerns about long-term inflation have cooled.
The constant reassurance of Fed officials also played a role. The market believes that even if inflation continues to exceed the Fed’s target value for several months, the Fed will remain patient, because employment and economic activity themselves are the most critical factors. The Fed is not in a hurry to act until it sees a definite signal of economic recovery.
The expected change has made the U.S. stock market no longer plummeted due to rising inflation, but continue to enjoy the "doomsday carnival" under the feast of liquidity.
In this case, Fed policy will be more concerned. If there are signs that the Fed’s confidence in inflation assumptions is getting weaker, the stock market that benefits from quantitative easing will be nervous and the bond market will suffer.
Some market participants expect that the Fed may discuss when it will start reducing bond purchases at an upcoming meeting, but most analysts expect the Fed will not make a decision before its annual meeting in Jackson Hole, Wyoming, in August.
Putnam Investments’ senior market strategist Chris Gallipo said: “We are making progress, but the economy is not overheating, nor is it a runaway train. That would force the Fed to take action.”
But others worry that the market has become overconfident about inflation and other risks, including risks such as potential tax increases and economic growth peaking.
Analysts from the Global Research Department of Bank of America suggested that inflation may be more sustainable than many people expected, including secondary indicators. For example, the National Federation of Independent Business (NFIB) survey of small businesses shows that price pressures are penetrating customers. "The list of reasons for transitional inflation is getting longer and longer. The risks of higher and more permanent inflation are growing." Bank of America analysts wrote.