US Recorded a New 40-year High inflation; Fed Response Awaited

Federal Reserve Chairman Jerome Powell Holds News Conference After Rate Cut

US Recorded a New 40-year High inflation; Fed Response Awaited

US ─ The US recorded a whopping 9.1% inflation for the month of June. The inflation data is the highest the world’s biggest economy has seen in 41 years. Thus, the official data released by the US Labor Department has sent shockwaves not only to the entire US economy but also to the world’s economic landscape ─ especially the global financial markets. The S&P 500 closed by more than a 2% loss the day the data was announced.

The unprecedented inflation rate measured in the form of the Consumer Price Index (CPI) has revealed that despite the aggressive interest rate hike the US Federal Reserve has implemented over the past months, it is still unable to ground into a halt the ever-increasing inflation in the US. Therefore, the Fed could be prompted and pressured to continue its aggressive tightening monetary policy at the next policy meeting set to be held later this month.

The Worst is Yet to Come

Inflation could still be far from the worst despite the record-breaking inflation data. According to Anna Wong and Andrew Husby, Economists at Bloomberg, “It was premature for some to preemptively dismiss the June CPI report as old news, as it shows inflation creeping up in places where it can be harder to squash.” They continued, “The Fed is right to worry about the unmooring of inflation expectations — and this report raises the chance of an even larger rate hike than 75 basis points down the line.”

As the US is now on par with the United Kingdom’s (UK) recent inflation data of 9.1% – the highest inflation recorded this year in all of the developed countries, the US could soon overtake the UK.

In a note, Sal Guatieri, a senior economist at BMO Capital Markets, said in his commentary, “Rather than cooling down, inflation is heating up.” He continued, “While a pullback in gasoline costs in July and reported retail discounting will help tamp down the flames, the broad pressure in the core rate, led by plenty of inertia in rents, suggests inflation may not peak for a while and might remain stubbornly high for longer than anticipated.”

Meanwhile, the White House continued to downplay the record-high inflation, stating that there is more to uncover beyond the face rate, which makes for a great headline, and the US is still doing relatively better than its peers around the globe in terms of the overall effort it is making to ensure its economic stability.

US President Joe Biden gave a statement on Wednesday saying, “While today’s headline inflation reading is unacceptably high, it is also out-of-date. All major economies are battling this COVID-related challenge.”

The Bright Side: Inflation is Slowing Down

Even though the worst is most likely yet to come, the inflation increase appears to be tapering and slowing down compared to the previous months’ sudden spikes. Thus, this could signal that the inflation rate is nearing its ceiling as more tightening measures by both the Fed (employing monetary policies) and the US Government (utilizing fiscal policies) are expected.

According to Wells Fargo & Co. “We suspect more significant easing ahead as raw material, transportation, and wage costs have started to cool,”

In addition, Eric Winograd, a prominent economist at AllianceBernstein, shares the same prospect saying, “There may be some relief in the July numbers — commodity prices have come off the boil, at least — but we are a very, very long way from inflation normalizing, and there is no tangible sign of downward momentum.”

Lastly, the biggest beneficiary of the possible upcoming aggressive interest rate hikes in the coming months this year remains to be the US Treasury and US Dollar, as both spiked on the CPI report. The treasury yields yet again increased while the USD solidified its status as the top performing currency in the world.

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