Inflation, from the point of view of some quarters, follows the script and increases due to one-off bottlenecks and a distorted comparison to the same period of the previous year.
The core index of private consumption expenditure (excluding food and energy costs) increased by 3.4% year-on-year in May %, which was in line with Wall Street expectations, but also the strongest increase since April 1992. In the short term, this notion that inflation will subside is cold comfort to those oversaturated with higher costs.
Under normal circumstances, the recent flood of high inflation figures would be cause for great concern.
But in the context of the current Covid era, in some areas they have been a confirmation that the inflation picture is doing little more than following the script and rising due to one-off bottlenecks and the product of a skewed comparison with a period a year ago, when much of the economy was in shutdown mode.
market took little note of Friday’s PCE readings, which largely drove stocks higher and government bond yields rose only slightly.
This was mainly due to the fact that the Inflation data, though, suggested comparisons with the runaway scenario of the 1970s, however, the numbers are on the side of those who expect the trend to subside and then stabilize at a lower level, at least for now.
“It was right in the strike zone,” Mark Zandi, chief economist at Moody’s Analytics, said of Friday’s Commerce Department release. The PCE level is “consistent with the idea that the inflation increase will be temporary and that it is related to the reopening of the economy and some disruptions resulting from this rapid reopening”.
At least in the short term, the idea that inflation will eventually subside is cold comfort to those who are stressed with higher costs.
Everything from airline tickets to hotel stays to the cost of buying a home has gone up and only occasionally shows signs of abating. A separate inflation indicator, the consumer price index, increased by 5% in May from a year earlier, while the producer price index increased by 6,6, the fastest increase since records began.
Widespread price increases due to inflation
Consumers pay higher costs for almost everything. According to the Energy Information Administration, Gasoline nationwide up 20% from pre-pandemic levels and up 46% from last year. In the grocery store, prices for beef and pork are rising, with the Bacon has risen by 18.7% year on year, while ham is almost 8% higher and milk prices have increased by about 9%, according to the Bureau of Labor Statistics.
This pressure has the Attention of Fed officials attractedwho are closely monitoring inflation to determine if and when they should change the monetary policy steps they took during the pandemic.
The president of the Atlanta Fed, Raphael Bostic, said last week that the Inflationary pressures may be stronger and more durable than previously thought, and his counterpart in St. Louis, James Bullard, also said he was increasingly concerned.
“A new risk is that, as the reopening process progresses, inflation could surprise even further upwards, beyond the level needed to simply compensate for past failures on the low side. Policymakers will have to consider this new risk in the coming months and quarters – – James Bullard
The Fed likes to leave inflation at around 2 %, however, said, it is prepared to tolerate even higher values if the longer-term average remains at this level and the economy has not yet reached full employment.
Longer readings around the levels of the last two months: However, the core PCE, which rose by 3.1% in April, could force the Fed’s hand. As things stand, officials have begun discussing whether to cut the $ 120 billion that will be used monthly to buy bonds. Regardless, the Fed says it’s still not ready to talk about rate hikes before at least 2023.
“It’s time to talk about how we could reduce asset purchases. At the moment, talking about tariff changes is not even on the table.”- President of the San Francisco Fed, Mary Daly
However, talking about inflation is on the table for many in American companies. Company CEOs spent a lot of time during the conference calls this quarter outlining how inflation has affected their operations.
The owner of the Darden restaurant chain, which counts Olive Garden among its properties, said a few days ago that its outlook for 2022 was a 3% inflation hit. A few weeks ago, Campbell Soup executives also said that the Transport costs affect your bottom linealthough they expected to be able to cope with the situation.
“We faced a significant inflation environment in the quarter, as well as short-term increases in supply chain costs,” said Mark Clouse, CEO of Campbell. “We expected the vast majority of these drivers, but in certain areas the pressure has intensified, especially in relation to inflation and some of the transition costs from the Covid-19 environment. We are confident that we can address these issues and we already have plans and pricing in place as we finish the fiscal year and begin fiscal year 2022.“
Important political and economic implications of inflation
The risk of inflation could not be higher. If the current trend does not follow the script, the stunning economic growth of the past year will be quickly distracted. At the same time, the Biden administration expects inflation to remain low, with Treasury Secretary Janet Yellen repeatedly saying that the current high deficit spending will be made affordable by the low interest rate environment.
“We are focused on eliminating some of these bottlenecks in the short term and allowing us to move to a strong type of full employment and post-pandemic economy as soon as possible. Ultimately, this will mean a fast-growing economy with a larger workforce over time. “- senior White House official.
The official under the Condition of anonymity spoke, said that market prices are responding to the idea that inflation will subside and that the current round is temporary and large numbers are inflated by base effects.
Boston Fed President Eric Rosengren said in a presentation that the area of rising inflation that worries him the most, housing isprices are rising at a rate not dissimilar to what we experienced in 2005-2007. … We have to worry about housing prices in a boom-bust scenario.”Overall, however, the expectation that inflation will remain at the current level is “not a particularly good forecast”.
Last updated on June 27, 2021
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