To The Moon

Understanding what is behind the painfully high May CPI inflation is key to understanding where it is headed and when.

Today‘s Key Questions：

1. Has CPI/inflation peaked? Will it hit a new high?

2. Why is the current inflation so strong?

3. Why fierce rate hike would bring more serious economic problems?

As we all know, the U.S. May CPI data hit a 40-year high to 8.6%！

Source from Wikipedia

Data show that the month-on-month and year-on-year increases in the U.S. CPI in May were significantly larger than those in April. After excluding the volatile food and energy prices, the core CPI in May, rose by 0.6% month over month(MoM) and 6% year over year (YoY), both higher than market consensus.

1. Why is the Inflation So Severe?

According to Moody‘s Analysis, the Russian and Ukraine conflict (caused the spike in oil and other commodity prices）is the #1 reason that should be responsible to the May's CPI data, followed by the Covid-19 pandemic & the Affordable housing crisis. 

Specifically, U.S. energy prices rose by 3.9% MoM in May, up 34.6% YoY, the largest YoY increase since September 2005.

Among them, gasoline prices rose 4.1% m-o-m and 48.7% MoM; food prices rose 1.2% MoM and 10.1% YoY. The first time that the YoY increase exceeded 10% since March 1981.

At the same time, the cost of living, which accounts for about one-third of the CPI, rose by 0.6% MoM, the largest MoM increase since March 2004; the YoY increase was 5.5%, also hitting the highest level since February 1991.

Below the contrast shows the shelter inflation in the CPI will continue to rise.

Source From: americanactionforum.org

Meanwhile, because of record price increases, from November 2020 to April 2022, U.S. residents' Consumption rate growth was sharp than Compensations increase, causing Americans' personal savings rate to hit a 20-year low.

It seems to tell us that the signs of economic recession are very obvious.

The latest data released by the U.S. Department of Commerce showed that the U.S. gross domestic product (GDP) shrank by 1.4% in the first quarter, which records the first time that U.S. economy shrink since the second quarter of 2020.

Based on the current situations, inflation is highly possible to break 9. This indicates that inflation shock is not over and is only the beginning. US stocks fell for three days in a row, S&P 500 fell into a bear market. $S&P 500(.SPX)$ ，$DJIA(.DJI)$ ，$NASDAQ(.IXIC)$ .

2. Will continued aggressive rate hikes help lower inflation?

At 14:00 ET on Wednesday, the Fed will announce the Fed’s interest rate plan. This time, the market expects a rate hike increase of 75bps in June and July,

The purpose of the Fed’s interest rate hike is to curb inflation. But many economists have doubts about the negative impact of the Fed's aggressive interest rate hikes.

1) The timing of the rate hike hits the stagflation of the US economy.

The timing of the Fed's recent rate hike is not ideal. Affected by the conflict between Russia and Ukraine, global oil prices have soared. The US, as a country on wheels, suffered from high oil prices. The economy in the United States has been forced to increase cost. The cost of enterprises, the supply chain, and the labor force is high and insufficient. The economic growth of the United States may be stagnant, and the downward pressure on the US economy is great.

2) Interest rate hikes have turbulent financial markets.

The interest rate hike has a great impact on the over-issued funds flowing into the capital market. On the one hand, after the interest rate hike, bonds yields and the US dollar have soared, and liquidity has weakened. On the other hand, it will increase the cost of financing, which in turn will prompt the financial market to pursue higher profits and volatility.

3) The dollar will continue to depreciate without rate hikes.

As the balance sheet of the United States has swelled and the national strength of the United States has not increased synchronously, it has brought instability to the dollar. However, if interest rates were not increased, the dollar would continue to depreciate rapidly, which would be favorable for trade. Goldman Sachs estimates that the U.S. dollar is currently overvalued by about 18%, and the appreciation of the U.S. dollar has been difficult to maintain.

Therefore, the current US economy is facing a desperate situation.

Due to the overissuance of currency and fiscal stimulus in the past two years and government's slow action on inflation, and the Russian-Ukrainian conflict contributing to inflation, the inflation of U.S. seems under control.

The inflation of US seems to go out of control because the government over-issued currency and failed to respond to inflation in time, and also the unexpected Russian-Ukrainian conflict.

While raising interest rates is not an effective cure for inflation. Currently, the global financial order was disrupted, investors are faced with more volatility, and the recovery of the world economy is also slowing down.

At present, the most effective way for the United States to solve inflation may count on restoring the efficiency of the industrail chain and gradually balancing supply and demand.

Final question for you:

What's your understanding of inflation and related-investment? 

What's your strategy to handle the volatile and not optimistic market?