Saturday July 2, 2022

Inflation in the United States rose 8.3 per cent year-on-year in April, data from the US Labor Department showed, however it slowed in comparison to previous months, breaking the seven-month streak. The strength in inflation shows the need for monetary policy catch-up from the US Federal Reserve, experts said, paving way for at least a 50 basis points rate hike in the upcoming FOMC (Federal Open Market Committee) meeting.

What contributed to the rise in inflation?

“The print indicates that inflation pressures have begun the pivot toward services from goods. And – while it was long expected – services are not yet fully ready to absorb the demand. This comes even as the pandemic-related excess in the goods sector has begun to subside. The broad-based services inflation will ensure any descent is slow,” Madhavi Arora, Lead Economist, Emkay said. 

The persistent strength in core inflation (up 0.6 per cent month-on-month from 0.3 per cent prior) is probably going to keep pressure on the FOMC to raise rates by 50 basis points at least at upcoming meetings, Arora added. Core inflation removes volatile food and energy prices from the count. Experts said the continuing rise in energy prices indicate that the full picture of inflation is still to be accounted for in coming months.

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“We’re starting to see energy pull back a little bit, but it’s not enough,” Kathy Jones, chief fixed income strategist at Charles Schwab told CNBC. “The markets were hoping for a better number and it’s not good enough to rule out more Fed tightening,” Jones added.

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What can the US Fed do?

Jeremy Siegel, Wharton professor of finance, told CNBC the US Fed needs to be aggressive and the central bank should go up to 100 basis points rate hike. The question of whether to do a 25, 50 or 75 basis points rate hike now doesn’t mean that much, he added.

In a separate statement, Siegel said the current inflation situation is because the Fed and the government “went overboard” with stimulus programs to cushion the effects of COVID-19. The US is playing “catch-up” because the Fed did not intervene sooner with monetary tightening through interest rate increases and asset reduction programs, he said in a podcast this week. 

“We’re going to have high inflation throughout this year and into next year, and I don’t really see a slowdown until 2024,” Siegel said. In fact, the official inflation figures are understated because they don’t reflect the recent increases in housing prices, he noted, blaming a lag in the Bureau of Labor Statistics incorporating that data. 

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