Surging Inflation could Fuel Fed's 'Political Rate Hike'
The U.S. consumer price index
(CPI) rose 6.2% in October from a year earlier, the 17th consecutive monthly
increase, higher than the previous value of 5.4% as well as market expectations
of 5.9%, according to the latest data released by the U.S. Department of Labor on
November 10. Stripping out volatile food and energy prices, annual core CPI ran
at a 4.6% pace in October, higher than the market expectations of 4.3% and the previous
value of 4%.
Looking at the data, the U.S. CPI rose for almost all items in October. The
items with a large increase in the CPI from the previous month included: 1. Household necessities: (1) Food, including meat, poultry,
fish and eggs (3.7%) and sugar (4.1%); (2) Energy commodities, such as gasoline
(6.1%) and fuel (12.3%, up 59.1% year on year); (3) Energy services, such as
electricity (1.8%) and natural gas services (6.6%). 2. Commodities related to
the chip shortage: new cars (1.4%) and used cars (2.5%). The chip shortage is
still unresolved, and consumer demand for cars is difficult to be met, all of
which are reflected in higher prices. 3. Services related to outdoor
travel: hotels (1.5%), dining (0.8%), car rental (3.1%), tickets for sports
events (8.3%), postage, and express (4.2%). House rentals rose by 0.4% month on
The U.S. CPI rose more than
expected in October, suggesting businesses are passing on higher costs to
consumers through price hike. Rising prices indicate that people's real wages are falling further. A report from the U.S.
Department of Labor noted that inflation cut Americans' real wages by 0.5% from
September to October, with wage growth offset by a surge in CPI. It is clear
that inflationary pressures are rising in the U.S. economy.
Market reaction to the U.S.
price data was strong, with spot gold rising briefly by about USD 25 to USD
1,850 an ounce, up more than 1% on the day. On November 10, the Dow fell 0.66%,
the S&P 500 fell 0.82%, and the Nasdaq plunged 1.66%.
The surge in
inflation data in October has thrown into doubt the U.S.'s assessment of future
inflation and monetary policy. In its information tracking
research, ANBOUND found that prior to the release of the data, key officials in
the U.S. government tended to believe that inflation in the country was
temporary. U.S. Treasury Secretary Janet Yellen has
insisted that current inflationary pressures are temporary and that the Fed
will act if needed to prevent a rerun of 1970s-style price rises. While
acknowledging that inflation has proven to be more persistent than expected,
she believes that the situation will return to normal in the coming year.
Federal Reserve Chairman Jerome Powell also called the current high inflation
"transitory," but he was uncertain when the supply chain
disruptions would be resolved. As for the prospect of interest rate hikes,
Powell said that now is not the time to raise the benchmark interest rate, the
timing of tapering does not directly signal the significance of raising
interest rates. "We believe higher inflation will persist and we will use
our tools to keep inflation under control when appropriate," he said.
Powell said recently that "there is still a lot of room to achieve maximum
It can be seen that both
Yellen and Powell hold a "dovish" view on inflation expectations and
monetary policy adjustments, that is, they believe the current rise in
inflation is temporary and will not trigger tightening measures such as
interest rate hikes. ANBOUND researchers understand
that both Yellen and Powell have a distinctly "government official"
attitude in their views (although Powell is more independent as Fed chair) and
do not wish to tighten the monetary environment by raising rates too soon,
which could derail the U.S.’ economic recovery.
However, there is a clear
divergence in the U.S. over the inflation outlook, with a large part of the
market view that rising inflation could lead to accelerated tapering and that
rate hikes could come sooner. Some market traders then expect that the Fed
could raise interest rates twice in 2022, with a third hike of about 44%
likely. St. Louis Fed President Jim Bullard also believes the Fed will raise
rates twice next year.
over the next five years
hitting a new high of 3.10% shortly after the release of the U.S. Department of
Labor's report. This means that investors expect inflation to average around 3%
a year over the next five years, much higher than at any time in the decade
before the pandemic. A growing number of investment institutions are now
betting that the Fed will respond by raising rates at its June 2022 meeting.
Soaring inflation in the U.S.
has also thrown Joe Biden's administration off its feet.
With rising inflation threatening his political future, Biden acknowledged the
rising cost of living for Americans, saying in a
statement immediately after the U.S. Department of Labor's report that
"reversing this trend is my top priority". "Many people
remain unsettled about the economy and we all know why: They see higher
prices," said Biden, noting that "everything from a gallon of gas to
a loaf of bread costs more, and it’s worrisome, even though wages are going up".
Final analysis conclusion:
We note that Biden's strategy appears
to be shifting targets in the face of rising inflationary pressures. He
stressed that the responsibility for taming inflation lay with the Fed. "I
want to reemphasize my commitment to the independence of the Federal Reserve to
monitor inflation, and take steps necessary to combat it," Biden said in a
statement. For these reasons, we expect that the Fed is more likely to
implement a "political rate hike" -- a symbolic minimum rate hike --
as inflationary pressures continue to mount in the U.S.
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