Inflation has no limits in the US: the CPI shoots up to 6.2% and hits highs not seen in 30 years

Inflation has taken another leap in the US to reach levels not seen since December 1990. The general CPI stood at 6.2% in October, the highest rate of change in more than three decades. The sharp rise in prices related to energy (has risen 30% annually) It is beginning to permeate into other components, in addition to the problems in the supply chain and the shortage of some inputs that are making production processes more expensive. Although the October data has pulverized all forecasts, there could still be a few months before inflation peaks.

Monthly inflation has increased by 0.9%, that is, prices have risen almost 1% between September and October. In monthly terms, energy (+ 4.8%) and used cars (+ 2.5%) and food (+ 0.9%) were the components that increased the most.

For its part, core inflation stood at 4.6% year-on-year, the highest since 1991. These data have far exceeded the market consensus, which spoke of a variation rate of 5.8% in headline inflation and 4.3% in core inflation. core. This type of inflation does not weigh raw food or energy, which reduces its volatility and increases its reliability to know the real state of demand and the economy in general.

Analysts at TD Securities have revised their short-term inflation estimates upwards. Much of this increase is due to a renewed uptrend in used vehicle prices. The microchip crisis, which is preventing automakers from meeting demand, has made second-hand vehicles a highly prized commodity.

Before the data published this Wednesday, TD Securities expected an average increase of 6.2% for the fourth quarter of 2021 (October, November and December), while for the fourth quarter of next year it will moderate to 2.3%. Now, these forecasts could be quite short. James Knightley, economist at ING, does not rule out that the CPI will touch 7% in the coming months.

For the core CPI, they forecast a variation rate of 4.7% in the fourth quarter of 2021 and 2.5% for the fourth quarter of 2022. On the other hand, these economists believe that inflation will reach its highest point in December of this year. The Federal Reserve could be faced with a rock and a hard place if this trend persists, which has already generated some division with the rate of tapering.

“Strong demand and a restricted supply will drive inflation higher also in early 2022, which could lead the Fed to raise interest rates ahead of our forecast, which is dated December 2022. If inflation continues to exceed expectations, the Fed could also accelerate the reduction in bond purchases (tapering) , but for now we believe that there will continue to be a constant reduction until mid-2022 “, they point out from Oxford Economics in a note.

A historic savings bag, fiscal stimuli that have reached the pockets of families and low interest rates have created the perfect breeding ground for demand to exceed supply (which also faces several unexpected limits) in the short term. This imbalance is generating a shortage of some products, but also of certain profiles of workers. All of this is causing cost increases (inputs, raw materials, higher labor costs …) that end up being passed on to the consumer, as reflected in the CPI.

For now, the main drivers of inflation are two: energy (it has shot up 30%) and second-hand cars and trucks (they have risen 26.4% year-on-year). However, new vehicles are also clearly beginning to become more expensive due to the shortage of chips: in one year their price has risen by 9.8%. If energy continues to rise, other components could be the next ‘casualties’.

Inflation in 2022

Nonetheless, TD Securities analysts believe that “inflation will slow significantly in 2022 as the impact of fiscal stimulus wears off and supply constraints ease, however we do not expect the data to lose steam any further. short term”.

What would have to happen for inflation to stay high for longer? Economists at TD Securities warn that inflation could last longer than expected and reach higher levels given the complacency that the US Federal Reserve is showing (although the tapering is already official, rates remain close to 0% and the tone remains dovish).

Even so, for this price boom to continue independently, an even tighter labor market (lower unemployment rate and a broader rise in wages) and an even higher rise in inflation expectations would be needed, which would see reflected to a greater extent in the underlying CPI.

If the latter occurs, then the so-called ‘second-round effects’ of inflation would be beginning. To date, the rise in inflation has been concentrated in a few components (energy, second-hand cars or food), but little by little this inflation begins to permeate the constellation of goods and services that make up the shopping basket of the Americans.

In a final step, this should translate to higher wage demands that would feed back consumption and the inflationary phenomenon itself. Then the Federal Reserve would have no choice but to start raising interest rates and trying to get ahead of the curve to ‘water down’ inflation expectations.