Inflation in the US is at a 40-year high, but the Fed should be concerned not so much with the level of prices as with its structural persistence – the share of companies planning to raise prices has risen to a record level and continues to grow. It is becoming increasingly difficult to expect a natural fading of inflation spike by the second half of 2022 and to convince the public of this and the reputational damage of the Central Bank is growing. All sorts of factors contribute to inflation – rising wages, relatively high resource prices and continued tensions in supply chains. The Fed will have to respond aggressively, and the prospect of a 100 bp rate hike and even a tightening of policy between meetings (which is very unusual) is becoming more and more real.Despite the high level of expectations – 7.3% in annual terms in terms of headline inflation, the January report, however, exceeded expectations. In annual terms, prices rose by 7.5%, in monthly terms by 0.6%. At the same time, core inflation rose to 6%. The last time America experienced such inflation was in February 1982:Considering the rise in prices separately by consumption components, one can note its homogeneity: goods and services in all categories became more expensive, the rapid demand for used cars has once again reminded about itself (price growth +1.5% in monthly terms). The breadth of price pressure is also evident from Tuesday’s NFIB report, which showed that 61% of companies have already raised prices in the last three months. This is a record figure. About the same proportion of small firms plan to raise prices in the next three months:The pricing power of firms is growing as they realize that there is an opportunity to pass the costs on to consumers as their incomes rise. Now there are 1.7 vacancies per unemployed American, as there is a choice where to be employed, the adjustment of labor supply to demand is slow, which determines the stability of the positive trend in wages.After yesterday’s report, one of the hawks in the FOMC, James Bullard, spoke about the possibility of a 100 bp rate hike or monetary policy tightening between meetings, hinting at an urgent need to get price increases under control. This prospect noticeably stirred up both the stock and bond markets, the yield on 10-year bonds broke through the 2% mark, stock indexes yesterday closed the session in the red zone, today the decline continues. The baseline scenario for the March Fed decision becomes a 50 bp rate hike:A month ago, the chances were only 4.8%.Inflation is now primarily driven by supply constraints amid strong demand. The latest data shows that the shortage of microchips has somewhat decreased, while the labor force participation rate in the January NFP increased significantly, which may gradually begin to contain very fast growth in wages. Meanwhile, used car prices, which have risen 55% since June 2019, will soon begin to correct as car production gradually recovers.
Source: Tickmill