(Source: US Labor Department)

US inflation is hot and consumers feel the heat


The US consumer price inflation (CPI) rate held steady at 5.4% in July, unchanged from June’s 13-year high , the Labor Department said in a much anticipated report released Wednesday (August 11). The pace of growth was expected to dip to 5.3%, according to Wall Street economists, reflecting the low base effect caused by the Covid19 crisis, the re-opening of the economy and continued supply constraints.

Main upward pressure came from food, led by sharp increases in food at home and food away from home, new vehicles and shelter.

On a month-to-month basis, CPI rose 0.5%, matching a consensus forecast from economists surveyed by Dow Jones, compared with a 0.9% gain in June. The monthly increase in consumer prices was partly due to a 1.6% jump in energy prices with gasoline prices rising 0.6% after a sharp 2.9% spike in June, along with a 0.7% advance in food prices.

The so-called core price index, which excludes food and energy because their prices are much more volatile. rose to 4.3% in July from a year before, down from 4.5% in June and in line with market expectations.  The government said core CPI increased 0.3% in July on a month-over-month basis, also down sharply from the 0.8% average increase in the prior three months.

The reading on US price growth comes as investors are updating their bets on how quickly the Federal Reserve will begin easing off the monetary stimulus pumped into the economy since March 2020. One main concern has been whether hot inflation would prompt central bankers to begin reducing monthly bond purchases sooner than markets are expecting.

Analysts at Morgan Stanley on Tuesday brought forward their forecast for the US central bank to begin tapering to December 2021.

“The big question at the moment is are we at peak CPI or is there more in the tank?” Michael Hewson, chief markets analyst at CMC Markets told Reuters adding that a strong figure could trigger a spike in bond yields and send jitters through stocks.

Some Federal Reserve officials view the surge of inflation as “largely transitory” and argue that prices won’t continue to increase at their current pace for too long. However, other policy committee members have made more hawkish statements this week, causing US Treasuries to fall back.

Kathy Bostjancic, Chief U.S. Financial Economist at Oxford Economics said that price increases stemming from the reopening of the economy and ongoing supply chain bottlenecks will keep the rate of inflation elevated and sticky as supply/demand imbalances are only gradually resolved.

Republicans have blamed Biden and the Democratic economic agenda for recently high inflation, The Hill writes. As economists and politicians exchange views, American consumers see the money in their pocket not stretching as far as it used to paying higher prices for everyday goods and services.