US inflation Surges to 31-year High of 6.2% in Test of Fed ‘Patience’

US inflation has surged in October, with the consumer price index on a year on year basis clocking 6.2%. On a month view US CPI is up 0.9%.

Inflation is now running at its hottest level since 1990, challenging the US Federal Reserve’s oft stated view that inflationary pressures are transitory.

The Fed had assumed that elevated inflation was related to supply chain issues that would gradually ease as supply and demand came more in sync, but there are no signs of that happening.

Instead, price rises seem to broadening out through the economy and are not just confined to areas pressured by pent-up demand from reopening after the worst of the Covid pandemic.

CPI inflation stood at 5.4% in September, so the latest data represents an acceleration in price rises. The 0.9% monthly increase also indicates price rises are picking up momentum when compared to 0.4% for the three months to the end of September.

Underlying core inflation, which removes traditionally more volatile items such as energy and food, was up from 0.2% to 0.6% on a month view and from 4.0% to 4.6% annually.

Is the Fed complacent on US inflation?

US Treasury Secretary Janet Yellen said yesterday that the US authorities would not allow a re-run of the 1970s to take hold, where inflation threatened to get out of control.

However, with US inflation at its highest level in decades and the US Federal Reserve just last week stating that it would be “patient” on monetary tightening, fears are mounting that the Fed may be being too complacent.

The Fed’s test of “substantial further progress” has been met on sustaining prices above the 2% target rate for inflation, although it has clearly overshot that in a worrying way. But its second test, on employment, measured by the Fed’s preferred data points of employment-population ratio and the participation rate, is yet to be met.

US equity markets, which have benefited from loose monetary conditions, greeted the news by falling at the open after printing new all-time highs over the past few days.

The Nasdaq is performing worst, where Big Tech and other tech stocks are on stretched valuations. Nevertheless, the Dow was briefly in the green but is now lower and the Nasdaq down 0.4%. The S&P 500 is 0.1% lower.

The US 10-year Treasury note yield  jumped from 1.475% to 1.501% on the inflation news.

Bond watchers will be aware that the short duration end of the curve has reacted more sensitively than the longer end, which means that the yield curve is flattening – that ultimately means less room to manoeuvre for the policymakers at the Fed.

US inflation – Equities lower, bitcoin heads for new record, gold rallies

Bitcoin moved back above $68,000 on the inflation news, as it closes in on a new record high above $69k, while gold’s breakout continues, trading 1.6% higher at $1,860.

Adding to the concerns around inflation, yesterday US producer price inflation year-on-year rose to 8.6% and 0.6% on the previous month. Core PPI was 6.8% and 0.4%, respectively.

Supply-chain disruption and shortages are pushing costs higher, with companies finding they are able to largely pass on those costs to consumers.

In addition to price rises in shipping, materials, component costs and energy, wage costs are also coming to the fore. A record 32% of US small businesses say they plan to increase wages over the next three months, with the services sector particularly impacted.

The Fed has announced that it will start cutting back on its asset purchases this month but may come under pressure to speed up the rate of tapering.

Although the Fed is unlikely to adjust its thinking on the timing of an interest rate rise in the near term, FOMC members may start to grow more nervous about the prospect of being forced into a position where they end up having to move harder and more boldly on interest rates to make up for lost time on taming inflation.