US Inflation Data Prompts First 2022 US Fed Rate Hike In March

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US Inflation Data Prompts First 2022 US Fed Rate Hike In March

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  • US consumer price index rose 7 per cent over 2021
  • US economy 8th highest inflation rate out of 46 countries studied
  • Australian economy similarly experiencing supply chain constraints as a result of Omicron

Although global markets ended 2021 on a positive note, encouraged mostly by the idea that the end of the pandemic drew near despite Omicron, rising inflation rates remained a priority agenda to be addressed among US Federal Reserve Bank policymakers. Fresh into 2022, economists have already latched onto the notion that the central bank may move to implement interest rate hikes sooner rather than later as suggested in September.

The latest release by the US Labour Department presents reason for market analysts to believe this focus on curbing inflation will likely result in a first rate hike implemented in March, when the US Fed is next scheduled to meet. According to the consumer price index summary published yesterday, a 0.5 per cent increase on prices for all urban consumers was recorded as of December, following a corresponding 0.8 per cent rise just the month before.

For 2021, the 12-month increase in this index is tracked at 7 per cent — the largest 12-month increase recorded since June 1982. While the breakdown of the consumer price statistics show a 0.4 decline in energy prices in December, Food prices presented among the more concerning data, charting a 0.5 per cent increase in December, followed by a 0.8 per cent increase in November as part of a three-month trend. Of particular note is the growing concern in Washington that the current Omicron viral transmission event in the US would further exacerbate already-strained supply chains to do with domestic food supply.

Echoing these concerns, US President Joe Biden addressed the US Labour Department statistics, saying “This report underscores that we still have more work to do, with price increases still too high and squeezing family budgets.” Commenting on the effect of existing supply chain challenges on rising inflation data, White House economic adviser Brian Deese appropriated inflation as a “global phenomenon”.

Despite the reassurance provided, research by the Pew Research Centre presents the US economy as holding the eight-highest annual inflation rate among 46 surveyed countries — trailing just behind less-developed economies in Brazil and Turkey. Within the study by Pew, other developed economies presenting with high inflation rates include New Zealand, and Spain; both yielding over 2 per cent increases in inflation rate within a 12-month period from 3Q19.

Political Incentive to Manage a Balance Between Inflation and Interest Hikes

While there’s truth to the idea that inflation concerns are not uniquely a pressing issue to just the US economy, they provide incentive for the Biden administration to address the matter in light of diminished approval ratings across the US. However, the task of managing increased inflation through progressive interest rate hikes is a tightrope act which will require tact and efficiency in its implementation. This latest consumer price index data leads analysts to expect with almost certainty that the anticipated rate hikes will come sooner in March.

Supply chain constraints to food supply have likewise seen Australian cities recognising an immediate and similar challenge just after the Christmas and New Year holidays. Among other pressing issues, most of which related to the current spread of the Omicron variant, supply chain matters are likely to create political incentive for Canberra to act swiftly ahead of elections expected this year.

Louis Mosmann

Louis Mosmann is a Private Wealth Client and Research Assistant at KOSEC- Kodari Securities. Louis covers macroeconomic events, global markets and ASX300 company announcements, allowing clients to make more informed investment decisions. Email Louis at l.mosmann@kosec.com.au.

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