US Inflation Reaches 30-year Highs as Pressure to Act Mounts

  • Caleb Thibodeau, Senior Associate at Global Capital Markets for Validus Risk Management

  • 10.12.2021 02:45 pm
  • #RiskManagement

Commenting on the market reaction to US YoY CPI hitting 6.8% in November, Caleb Thibodeau – Senior Associate, Global Capital Markets for Validus Risk Management, said: “Although in-line with expectations, today’s CPI figure marks another push higher to new 30-year highs. This is sure to continue grabbing economic and political attention, with increases in prices seen in every category versus last month including services, goods, energy and food.

“On a long timescale, consumer prices may still only be gyrating about the mean as a reaction to continued supply-side bottlenecks. Regardless, the political pressure on President Biden, and hence the Fed, to acknowledge and act has grown immensely.

“The top three contributions to today’s CPI increase remain consistent from previous releases and make up over half of the 6.8% YoY figure: gasoline, shelter, and used vehicles. These are factors that could ease quickly, as we have seen recently in oil markets, but remain persistent for the time being.

“As CPI continues to see broad-based gains, we might expect the Fed to stay the course on the advanced tapering schedule implicated since retiring the word ‘transitory’. This means winding down net asset purchases to 0 by as early as March 2022 – a move that is already having unintended consequences in Treasury market liquidity, complicating the process.

“While the contributors to the CPI increases continue to have a major reopening component, estimated at 1.73% of the total 6.81% release, non-reopening and energy components have also increased to new highs since the beginning of the pandemic. This indicates a notable upside risk to inflation, given the inability of the labour market participation ratio to recover and persistent wage price pressures.”

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