July 13, the U.S. Department of Labor released data show that the U.S. CPI in June rose 5.4% year-on-year, the largest year-on-year increase since August 2008, the previous value of 5%; CPI in June rose 0.9% YoY, a new high since June 2008, the previous value of 0.6%; excluding food and energy prices in June core CPI rose 4.5% YoY, a new high since May 1992 The core CPI rose by 0.9% YoY in June, compared to 0.7% YoY. Dagong International believes that the U.S. CPI is at a new high and the risk of inflation continues to rise will push the Federal Reserve to tighten the currency, but the impact on China’s monetary policy and financial markets is not significant.
The main driver of the U.S. CPI to a new high is the sharp rise in used car and truck prices, followed by the continued high energy prices, low base effect, etc..
Used cars and trucks prices rose sharply is the main reason for pushing up the CPI in June. From the data, the U.S. used car and truck prices in June rose 45.2% year-on-year, has risen sharply for three consecutive months, the previous value of 29.7%; ringgit growth of 10.5%, the largest ringgit growth for the used car and truck price index since it was first published in January 1953, contributing to the month’s CPI increase of 1/3, the previous value of 7.3%. The reason for this is that people tend to take private cars since the epidemic has driven the demand for cars, and the significant increase in travel and dining out in recent months after widespread vaccination has further stimulated the demand for cars and other transportation, but the continued shortage of labor supply, production supply and inventory in the U.S. after the epidemic has caused the problem of oversupply to continue to rise, coupled with the shortage of semiconductor supply in recent months has led to new car production This, coupled with a further slowdown in the production of new vehicles in recent months due to a shortage in the supply of semiconductors, has resulted in a significant increase in vehicle prices in recent months.
Energy prices continue to be high is the main reason for the continued high CPI in the United States. From the data, the U.S. energy commodity prices in June rose 44.2% year-on-year, 54.5% previously, including gasoline up 45.1% year-on-year, 56.2% previously, fuel oil up 44.5% year-on-year, 50.8% previously; ringgit, fuel oil up 2.9%, 2.1% previously; gasoline up 2.5%, -0.7% previously. The significant growth in commodity prices such as energy since this year is the main factor leading to the persistently high CPI, which is rooted in the great global release since last year’s epidemic, the severe over-issuance of the dollar and the lack of supply. Since this year, with the popularity of vaccinations, government relief payments and other stimulus measures, the U.S. demand side has recovered faster, and companies have a stronger incentive to obtain raw materials and replenish inventories, but the supply side has recovered slowly and stocks are insufficient, after panic buying exacerbated pipeline disruptions, refinery shutdowns and low start-up rates, resulting in a persistent supply-demand gap and high energy commodity prices.
In addition to the impact of used cars and trucks and energy prices, the rapid rebound in U.S. post-epidemic consumption also drove prices higher. This follows Biden’s $1.9 trillion fiscal stimulus that provided high relief directly to the U.S. population, significantly boosting the spending power and consumer demand of the entire population. In recent months, dining out, travel, and vacation activities have been high, pushing up the prices of hotels, restaurants, airlines, and automobiles high. In addition, the low base effect is also part of the reason for the current high CPI, as the U.S. is in the primary stage of the new crown outbreak since the second quarter of last year, the data is at a lower level.
Inflationary pressure, the Fed released tightening signals, but high unemployment and other issues will still hinder the Fed’s tightening pace.
After the release of CPI data last month, the Fed stated that its CPI was high mainly due to the low base effect and will fall back on its own as the labor market recovers and the supply and demand gap narrows. However, this month CPI continues to hit record highs, Fed officials have begun to wonder whether long-term inflation can fall as expected, and expressed concern about the upside risk to inflation in the near future. The latest Federal Reserve monetary policy meeting minutes show that if the U.S. inflation rate continues to rise or remain at a high point in the next period, rather than gradually fall as the Fed expects, the Fed may have to reduce the size of bond purchases in advance. Recently, the U.S. federal funds rate futures show that the Fed in December 2022 the probability of a rate hike of 90%, in January 2023 the probability of a rate hike of 100%, compared with the previously expected probability has increased.
In addition, the U.S. economy is expected to pick up speed in the second half of the year to repair, which will give the Fed some room for monetary tightening. In the first quarter, U.S. real GDP growth reached 6.4%, mainly benefiting from continued growth in household consumption and business investment. U.S. demand growth was even stronger in the second quarter, with household spending (e.g., durable goods, etc.) continuing to rise and the service sector recovering faster against the backdrop of increased household savings, easy credit conditions, continued fiscal support and the restart of productive activity in the post-epidemic economy. Overall, the probability of economic speed-up in the second half of the year is higher, which will give the Fed some policy space for monetary tightening.
It is worth noting that the problem of high unemployment in the United States may hinder the Fed’s tightening pace. Previously, the latest U.S. non-farm employment data on July 2 showed that the unemployment rate rose to 5.9% in June, much higher than the level of 3.5% before the epidemic. The reason for this, the U.S. epidemic since the higher unemployment benefits and the current job mismatch is the main reason. On the one hand, the high level of unemployment benefits in the U.S. has significantly reduced people’s willingness to be employed, and the wage level in some areas is even lower than the unemployment benefits, causing the U.S. labor force participation rate to continue to be lower than the pre-epidemic level. According to incomplete statistics, states that canceled unemployment benefit payments early generally had better employment recovery than states that still continued to pay unemployment benefits. In addition, the epidemic has contributed to job mismatch issues, such as the inability of unemployed workers in construction, real estate, manufacturing and other industries to meet the continued growth in hiring demand in service industries such as education and hospitals. A recent survey by ZipRecruiter, a U.S. recruiting platform, found that 70 percent of job seekers who previously worked in the leisure and hospitality industry said they were looking for work in another industry; a survey of U.S. workers who lost their jobs in the epidemic by the Federal Reserve Bank of Dallas found that 30.9 percent did not want to return to their previous jobs, up from 19.8 percent last July.
At present, the Federal Open Market Committee (FOMC) will remain the policy rate at near zero and continue to purchase U.S. Treasuries and agency mortgage-backed securities to support the economic recovery, but has increased the overnight repo instrument rate and the excess reserve rate by 5 basis points to 0.05% and 0.15%, respectively, monetary tightening signal gradually revealed.