In the US, the consumer price index increased by 7% in December 2021. Inflation increased by 0.5% compared to November. Excluding volatile food and energy components, core prices rose 0.6% month-on-month and 5.5% year-on-year. Consumer prices posted their highest increase in almost four decades last year, suggesting an angry inflation backdrop that set the stage for the Fed's rate hikes to begin in March. Supply problems in terms of inflation still create rigidity in prices. The expectations that underlie the stagnation and decline in this ratio are the easing of the shortage problem, the high base effect will be felt next year, and possibly tighter financial conditions to restrain demand inflation. As you can see, temporality is not a phenomenon that can be achieved by itself. In addition to high net inflation, employment that has recovered theoretically meets the rate hike criteria.
If we look at the sub-items; The biggest contribution to the increase in all seasonally adjusted items was the increases in housing and used car and truck indexes. Although the food index increased less compared to the last months, it also contributed by increasing 0.5% in December. The energy index fell in December, ending a long series of increases; It fell 0.4% as both gasoline and natural gas indices fell. Home goods and operations, clothing, new vehicles and medical care indices all increased in December, along with housin, shelter and used car and truck indices. As in November, motor vehicle insurance and recreation indices were among the few indices to decline during the month. Other indices that rose in December included airline fares (2.7%), personal care (0.5%), tobacco (0.7%) and education (0.1%). Compared to the previous year, the energy index increased by 29.3% and the food index increased by 6.3%.
Non-seasonally adjusted 12-month percentage change in CPI, December 2020 - December 2021… Source: Bloomberg, US Department of Labor
As a result; Data that will not change the Fed's views and will not affect its action plan, having abandoned its tentative rhetoric long ago. In addition to the stagnation effect in some items, it is positive that there is no decrease in demand in services and airlines. In the periods when the variant is effective, the fact that the activity does not decrease in the services sector, and therefore the demand does not decrease, will enable the Fed to act more easily. Another factor is real wages. On an annual basis, real wages decreased by 2.3% in weekly wages and 2.4% in hourly wages. Employee wages continue to erode in the face of inflation.
The Fed's rate hike in March is starting to become very likely. Higher data will also keep bond yields on their current trend. It's likely that the extreme impulse response situation won't happen as the picture is drawn close to the baseline scenario. In the 14-15 December FOMC minutes, it was emphasized that the strengthening economy and high inflation could cause rate hikes to occur earlier and faster than expected. However, for the Fed, the part that is not included in the prices is balance sheet intervention. How hard and to what extent it will do this is still unclear. There are expectations regarding the normalization of the CPI due to the dampening of demand and the easing of supply problems. The majority of Fed members think that the distorting effects of inflation should be avoided. As Powell said; While fighting inflation, the fact that it will not harm economic growth will be taken into account, and Powell is refraining from raising the limits on this issue for now. But his statement was significant: “High inflation is a serious threat to the economic recovery in the US, and the Fed will do so if it needs more aggressive rate hikes to cool inflation.” We hope to see more headlines regarding the balance sheet reduction strategy at the January 26 meeting.
Kaynak: Tera Yatırım
Hibya Haber Ajansı