The officially reported CPI inflation in the United States reached 7% and thus reached the highest level in almost 40 years. However, unlike four decades ago, the current inflation is accompanied by virtually zero interest rates in the Federal Reserve.
US CPI inflation in December it increased to 7.0% yoy
– informed the governmental Bureau of Labor Statistics (BLS). This is the highest reading since June 1982. Similarly to a month earlier, also this time inflation data did not surprise economists. In November, CPI inflation in the United States amounted to 6.8% y / y.
Whereas core inflation – i.e. the price index excluding fuel, food and energy – stood at 0.6% m / m and 5.5% y / y. This result exceeded analysts’ expectations by only 0.1 percentage points. percent It was both the highest level of core inflation since March 1991.
We have already had several months of very rapid increase in consumer inflation in the world’s largest economy. In February, CPI inflation in the US was only 1.7%, in March it reached the value of 2.6%, but in April it was 4.2%, and in May the American inflation reached 5%. and in June it reached 5.4%. July and August brought a stabilization of above 5%, which was also maintained in September. However, already in October CPI inflation accelerated to 6.2%, reaching the highest value in 30 years and breaking this peak in November. It was therefore impossible to defend the narrative of the “transitional” nature of the inflationary wave, forced by central bankers.
In December, fuels were slightly cheaper: gasoline was 0.5% cheaper than in November, and diesel – by 2.4%. However, this does not change the fact that gasoline was almost 50% more expensive than a year ago, and ON increased by 41%. Electricity prices increased by 6.3% yoy, and natural gas by 24.1% yoy. However
the price increase does not only concern fuel and energy. The prices of food for the year increased by 6.3%, for furniture by 5.8%, and for services by 3.7%. Massive inflation throughout 2021 was visible in car prices. New cars were 11.8% more expensive in December than a year ago, and used cars gained 37.8%. Still “only” 4.1% increased the cost of housing, although rents in the US are rising very quickly.
Inflation is raging and the Fed is asleep
Inflation in the United States is clearly and for a long time exceeding the 2% Federal Reserve target and it is not going to fall by itself. Even Fed Chairman Jerome Powell has already admitted that it is time to stop using the word “transitional” to describe the current inflationary pressures. – We tend to use the word to mean that changes will not leave a lasting mark in the form of higher inflation. I think this is a good time to step back from that word and try to be clearer about what we mean, Powell said in late November.
The highest CPI inflation in almost 40 years still remains without a decisive response from the American central bank. It is true that in November and December the Federal Reserve limited its asset purchase program (from a total of USD 120 billion to USD 60 billion per month). This, however, does not change the fact that with such high inflation and a very hot labor market, the Fed is still “printing” tens of billions of dollars a month while maintaining almost zero interest rates. When in the early 1980s and 1990s inflation was about the same as it is today, the federal funds rate was around 8%.
At present, there is virtually no chance that the Fed will come even close to this level with this level of indebtedness of the federal government and the corporate sector. The market assumes that this year we will expect at most 3-4 hikes in the federal funds rate by 25 bp. each. And this means that we will end 2022 with interest rates in the US of around 1% at best.
The market reacts
Although the data published by the BLS was broadly in line with the expectations of most economists, there was a strong reaction in the currency market. Soon after 14:30, the EUR / USD rate started to rise rapidly, reaching the level above 1.14. This means a breakout from the consolidation in the 1.1180-1.1380 range lasting from the beginning of December.