INFLATION KEEPS INFLATING

Annual US CPI gained by 5% (13-year high), a 0.3% overshoot to the consensus of 4.7%. This is the third reading since April that the metric exceeded the Fed’s target of 2% and it might be indicative of underlying economic pressures that Powell wants to dismiss as transitory. Inflation exlcuding food and energy came in at 3.8% from previous reading of 3%.

At last FED meeting on April 28th, Powell emphasized that there will be no expectation of interest rate increases this year unless inflation moves materially above 2% in a persistent way. The term ‘materially’ is open to interpretation, but persistence is quite clear in its definition. If the trend continues upwards, the FED might need to react sooner rather than later to avoid a dreaded hyperinflation scenario where they will end up aggressively increase interest rates to curb inflationary pressures.

QUOTE : “With regard to interest rates, we continue to expect it will be appropriate to maintain the current 0 to ¼ % target range for the federal funds rate until labor market conditions have reached levels consistent with the Committee’s assessment of maximum employment and inflation has risen to 2 % and is on track to moderately exceed 2 % for some time. I would note that a transitory rise in inflation above 2 % this year would not meet this standard”. UNQUOTE

 Source : Transcript of Chair Powell’s Press Conference — April 28, 2021 (federalreserve.gov)

Soaring commodity prices and supply constraints are pushing inflation from the supply side. As the economy reopens, the US might experience inflationary pressures also from the demand side, further adding to Powell woes. Last meeting, Powell, emphasized favourable labor market conditions before taking any monetary tightening actions. But the labour market has been improving consistently with unemployment rate at 5.8%, well below the double digit numbers experienced early last year but slightly above FEDs target of 4% over the long run. Initial jobless claims have also been on the downtrend with the week ending June 5th being near 15-Month low, seeing only 376,000 people filing new claims for unemployment benefits from over 6 Million last year.

It will be interesting to see whether Powell will change course this month on June 16th and whether he will start to think about thinking about raising rates.

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