Once again, US inflation figures are higher than expected, a new record for the past 40 years. It is also striking that the various methods of measuring underlying or core inflation suddenly started to rise sharply. Although crude oil prices have fallen, petrol and diesel prices are relatively high due to the shortage of refining capacity. That shortfall could widen later this year when the storm season hits the US South Coast in earnest. La Nina and above-average temperatures in the Atlantic Ocean will bring more and heavier storms this year.
Producer prices also rose by 18.6 per cent (!). In the 1970s, there was only one month in which producer prices rose more steeply (by 19.6 per cent). In a little while, the 1970s will pale into insignificance with today's inflation levels. The problem with raw materials, among other things, is that the fall in prices is entirely due to speculation about a recession and the fall in demand that would result. In reality, the tightness in the commodities market has only increased in recent months.
The low stocks make this market very sensitive to shocks. Such a shock can quickly give an extra boost to inflation.
Now, a lot of inflation is temporary, a result of the corona, monetary madness or the result of supply problems. The longer this temporary inflation lasts, the greater the chance that it will become entrenched. Rising energy and food prices strongly contribute to final wage demands, especially in this tight labour market.
Some components of core inflation are reasonably predictable. For example, rents are rising due to the tightness and high prices in the housing market, but the price increases of owner-occupied houses are also reflected in the rental equivalent of owner-occupied houses with some delay. This means that the recent sharp rise in house prices is only partly reflected in the inflation figure. More will follow in the coming months.
As we all know, last year inflation was better than expected in the summer (until October). These figures are now out of the equation (inflation is, after all, always a year-on-year figure), so that means inflation is likely to continue to disappoint. As a result, it seemed that the market was counting on a full percentage point increase at the next meeting, but now it is counting on a 75 basis point increase again.
The best indicator for core inflation in the somewhat longer term is the development of wage prices, and these are now approaching 7%. The employment cost index for the second quarter will be published at the end of this month and there is a good chance that it will continue to rise, although the Federal Reserve's current policy will do little to change this.
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