It is difficult to say it better than Capital Economics did yesterday. “The news on headline CPI inflation couldn’t have been much worse,” said Paul Ashworth, senior US economist at the consultancy.
Consumer prices rose by no less than 1.1 per cent in just one month in June. Energy prices rose by a simply staggering 6.6 per cent – that’s one month, remember.
The annual inflation rate hit 5 per cent. You would have to rewind the clock back all the way to 1990 to see the last time inflation in the US was that high.
Yet, inflation with food and energy taken out really wasn’t that bad. Prices were up 0.3 per cent in June, taking the annual rate to 2.4 per cent.
Combine that news on inflation with the sentiments expressed in the latest set of minutes from the Fed’s last interest rate setting meeting, published yesterday, and you could be forgiven for assuming that US interest rates are about to rise.
The minutes said a “firming in policy would be appropriate very soon.”
It may have only been a couple of weeks ago when the Fed last sat and deliberated, but the picture has got a lot more gloomy since then. Since then the Fannie Mae and Freddie Mac news has broken. Markets have tumbled, the US banking crisis has deepened. The Fed now has all guns firing, trying to avert a deepening crisis.
The feeling is that despite inflationary worries, rate cuts, maybe several, will follow.
Does this mean inflation in the future? Well, in the longer term inflation occurs when demand is higher than supply. And frankly, looking at the state of the US economy, it seems unlikely demand will create inflationary pressures for a very long time.
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