US: Inflation higher than forecast


After the 7% increase in the US consumer price index in December, it continued to rise in January, pointing to an increase of 7.5% compared to the previous year. In January, we see that the periodical inflation was 0.6%, above the expected level. Core prices, which exclude volatile food and energy components, increased by 6% a year ago, the highest since 1982, and increased by 0.6% compared to the previous month.


If we look at the sub-items; The biggest contribution to the increase in all seasonally adjusted items was the increases in food, electricity and housing indices. The food index rose 0.9% in January after increasing 0.5% in December. The energy index also increased by 0.9% during the month, with the increase in the electricity index partially offset by the decreases in the gasoline index and natural gas index. In addition to the housing index, household goods and operations, used cars and trucks, medical care and clothing indices were among the many indices that rose during the month. The energy index increased by 27% compared to the previous year, while the food index increased by 7%.


Inflation is at its highest since 1982, and supply factors affecting overall price spillovers and the possibility that wages spill fuel on it suggest that a peak is yet to be seen. The US is a consumer economy, and if the Fed wants to raise interest rates quickly and keep demand in check, there are concerns that it risks causing a hard landing. There is significant liquidity delivered during the pandemic period and the market has benefited from significantly lower interest rates. The current state of inflation has pushed the Fed to consider raising interest rates faster. Fed swaps have made a 50 bps rate hike almost certain in March, and have begun pricing in a 1 full point rate hike by July. This means that every meeting will be subject to a rate hike. The 1.25% funding rate in July will be a steep tightening.


Americans’ demand for wages worth working for, unbeatable to inflation, and constraints on labor supply are still causing wage increases to remain high. However, still lagging behind inflation, real wages decreased by 1.7% on an hourly scale and by 3.1% on a weekly scale compared to the previous year. Therefore, demand for wage increases will continue as inflation rises. There is a risk that the cost of the enterprises and the lively demand, the production that cannot keep up with this, will further heat the inflation.

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