There were high hopes that U.S. inflation would begin to moderate starting in May. But, it has not happened, inflation continues to accelerate, and headline CPI has risen from 8.3% (April 2022) to 8.6%.
Although core inflation, which excludes energy and unprocessed food prices, has moderated slightly from 6.2% to 6.0%, a much larger drop was expected, with speculation that it would fall to 5.7%.
If instead of looking at the year-on-year data, we look at the month-on-month data (April 2022 - May 2022), the picture we get is rather more complicated for the economy, as the month-on-month rate of change of the core inflation rate stood at 0.6%.
This figure is not only one of the worst month-on-month variations in inflation, but also if we annualize this figure (assuming that it remains at the same rate for the next 11 months) what we would have is that annual core inflation would not be 6.0% but 7.5%, therefore, rather than good hopes, it seems that the worst is yet to come.
And the same applies to the general inter-monthly variation, which was 1% and is the second worst figure in history, if we exclude the month of March of this year, when the conflict of the war in Ukraine had a strong impact.
This is a figure that, if repeated over the next 11 months, would lead us to an overall year-on-year inflation rate of 12.6% rather than 8.6%, as has been the case up to now. Warning signs are rising. Let's look at another perspective on the magnitude of annual inflation.
During the last months, it has been commented that the current inflation is actually a consequence of the base effect with respect to the stagnation of prices in 2020, but what does this mean? That since during 2020 prices did not rise but fell, they are now rising in a way that is over-proportionate to what is usual in a year to compensate for the lag of 2020 prices, so that if we measure everything together, we should not be so far away predictably (in theory) from what would have happened in the absence of the pandemic, well, far from it, let's see the following graph:
You can see the trend evolution of the CPI before the pandemic, it is the dashed line and you can see that the current CPI is not that it increased a little with respect to the trend of prices before the pandemic, but that it has gone totally out of control, since what would be expected is that the CPI would take a value of 272 and it is above 290, a gap that is not explained because it has to compensate for a fall in prices due to the pandemic, this is a phenomenon that has nothing to do with the base effect.
Inflation is so high in the United States that even though nominal wages are growing at one of their fastest rates in decades, close to 6% year-on-year, and in fact, unskilled wages are growing faster than skilled wages, at over 6%.
Even though wages are growing so much in nominal terms in the U.S., once we discount inflation, we find that real wages are falling by 3%.
Keep in mind that if nominal wages are growing by 6%, the question is, how much do employers have to raise prices to maintain their profit margins? That increase will also impact on inflation derived from the wage increase. Therefore, the issue becomes even more complicated.
It may be that real wages are falling, but to the extent that they fall with nominal wage increases rising, that fuels substantial price increases to offset the price increases in nominal wages.
What does this negative inflation data imply?
What it implies is that interest rate hikes are going to continue.
There were already some analysts who thought that from September onwards the Federal Reserve would change its schedule of interest rate hikes and would not raise them as much as it had announced it would do since inflation was going to moderate.
Well, if instead of moderating inflation accelerates, the rate hike will have to be hastened.
And what do these new expectations of interest rate hikes translate into?
First, higher interest rates on the US 10-year bond, because if we have higher interest rates, this also affects the cost of financing US government bonds.
Figure # 5: United States 10 years - USD10YT:X
Source: TradingView.
Second, the fall of stock market indexes, especially technology, since these are stocks whose expected economic benefits are located farther in time.
Figure # 6: US Tech 100 Cash - USTECH
Source: TradingView.
Third, in a depreciation of the Euro against the dollar, because if the Federal Reserve is going to raise interest rates more aggressively than expected with respect to the European Central Bank, further weakness of the Euro and inflation will be imported.
Figure # 7: EUR/USD
Source: TradingView.
Many are hoping that inflation will stabilize and then be brought under control without the need to withdraw the huge monetary and fiscal stimulus that has been added to the economy over the past few years. The worst is yet to come.
