It has been some weeks since we last discussed rising US inflation data and some economists’ interpretation of it as a temporary phenomenon. As widely expected, the Fed kept its benchmark short-term borrowing rate unchanged at last week’s meeting. However, the longer-term rates horizon now looks very different. After reviewing the latest economic data, the Federal Open Market Committee (FOMC) has revised its so-called “dot plot” and brought forward rate hikes from “no increases until at least 2024” to “two hikes in 2023”. Despite this change, and a 1% increase to the Fed’s headline inflation projection from March, the FOMC still views inflation pressures as “transitory”. As we mentioned in our last Weekly Brief, the Fed’s statements on inflation were always likely to change market sentiment and momentum. On Wednesday, the day of the FOMC meeting, the S&P 500 closed down 0.54% and the US Dollar strengthened.
The Producer Price Index and Consumer Price Index are important tools when it comes to gaining an insight into recent inflation trends. The latest data from the Producer Price Index shows that inflation continued to increase in May, when producer prices rose at their fastest annual rate (+6.6%, YoY) in nearly eleven years. In the same month, the Consumer Price Index for All Urban Consumers rose 0.6% MoM, or 5% YoY, while the core price index (which excludes the often-volatile categories of food and energy) jumped 3.8%. This is the largest increase since June 1992. It is, therefore, undeniable that inflation is rising – but only time will tell whether this represents a new structural trend or is a temporary result of economies reopening and prices recovering from coronavirus declines.
While central bankers in the US are already looking to normalise monetary policy, their European counterparts are moving more slowly. ECB President Christine Lagarde has said that monetary and fiscal stimulus should remain unchanged until there are clear signs that a “firm, solid, and sustainable” economic recovery is underway – but added that it may not be required for as long as initially expected due to what looks like an increasingly positive picture. At last, things are beginning to look up in Europe.
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