US Inflation: A Long Way To The Top

Headline US inflation has risen from 0.2% year-on-year last May to 1.7% today, but it is barely half-way to the 3.5-4% area where we see it peaking. While officials remain broadly relaxed, we believe inflation could remain elevated through next year, potentially triggering the Fed into earlier action on interest rates than they are currently signaling.

Headline rises 1.7% YoY, but core inflation is more benign

Headline consumer price inflation rose 0.4% month-on-month or 1.7% year-on-year, which was in line with market expectations as higher gasoline prices pushed the energy component up 3.9%, MoM. However, the core rate, which excludes the volatile food and energy components was a tenth softer than expected, rising only 0.1% MoM or 1.3% YoY.

This lower-than-expected outcome is seemingly due to a 0.7% MoM fall in apparel prices and a third consecutive 0.9% MoM decline in used car and truck prices. Most other components experienced price rises in a 0.1%-0.3% range, although recreation jumped 0.6%, which could reflect optimism on the reopening of the economy.

The softer core outcome is likely to be what the market focuses on and it should help to ease some of the bond market anxieties about inflation, but we suspect it will only be a temporary respite.

Inflation: the real climb starts now

Inflation has been gradually rising since 2Q20, but there will be a step-change in March and April with the economy in a very different position to what it was 12 months before.

With improved distribution efforts the US is vaccinating nearly three million people a day and with hospitalization numbers dropping, governors are reopening their states. This will gather momentum through the second quarter now that President Biden has assured us that enough vaccines will be available for all American adults by the end of May.

Consequently, headline inflation is set to hit 3% in April as prices in a vibrant, reopened, supply-constrained economy contrast starkly with those of 12 months before when the situation looked dire.

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