US Inflation Data May Further Accelerate and Fed Will Allow That

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After the US reported better-than-expected nonfarm payroll data last Friday, the country’s CPI data for October will be due this week. With the labour market recovery back on track and likely to meet the Fed’s lowered bar for maximum employment by mid-2022, inflation may further accelerate.

CPI will be released this Wednesday and it is expected to show price pressures running at their hottest pace in three decades. Unrelenting supply-chain bottlenecks, higher energy, and other raw material prices (PPI, Tuesday) add to strong positive base effects, which would not peak until early next year.

One of the key things that we will be looking for in the inflation data is signs of more broad-based inflation in services sectors, especially considering today’s jobs report suggesting that wage pressure increased further in October. Job openings and quits, which Fed Chair Jerome Powell mentioned this week, will be one of the metrics for evaluating labour market tightness. It will likely show employers having difficulty filling positions amid strong labour demands.

Supply-chain snarls and higher energy prices may mean the fastest CPI inflation since October 1990. The lift to 5.9% year-over-year will precede a further acceleration in November, possibly touching 6.4% in our current projections, which would be the highest since 1982.

Covid disruptions, port congestion and semiconductor shortages will continue to keep upward pressure on manufactured goods this holiday season, notably for the prices of new and used vehicles.

This may sour the consumers’ moods and support price expectations. The mix will vex Federal Reserve officials, but the configuration -- bottlenecks and energy prices -- might embolden Fed doves to see the source of upward pressure from “transitory” sources once again.

Leaning against that interpretation, a key feature of the September report was quicker inflation in non-reopening categories, including housing costs. We expect upward pressure to persist into 2022, replacing goods inflation as the dominant and more persistent category.

Inflation has run above the Fed’s 2% target on a 12-month basis every month since early this year. Several more months of this could restore pricing power on behalf of companies, already apparent on scarce products, and start to shift inflation psychology higher.

At the same time, the labour market is still millions of jobs short of pre-pandemic levels. The employment-population ratio, for example, stands at 58.7% compared to 61% in December 2019.

“We don’t think it is a good time to raise interest rates because we want to see the labour market heal further,” Powell said. “The level of inflation we have right now is not at all consistent with price stability.”

That’s an exact expression of the tension now in the new policy framework, which Powell led the central bank to adopt last year.

The central bank says it would not lift rates from near zero until it has reached maximum employment and has also said it would not prejudge what that goal is.
 
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