Fed maintains its stance amid rising inflation

KUWAIT: Consumer price index, a key measure of inflation for the Federal Reserve was released on Tuesday where it showed the pace of US consumer prices has accelerated unexpectedly in June.

The reading showed CPI rose last month at its fastest pace since August 2008, surging 5.4 percent from the previous year, while surpassing the 5 percent increase reported in May and the 4.9 percent rise forecasted by economists. On a monthly basis, the data showed price gains of 0.9 percent, the biggest one month jump since June 2008. Core CPI, the figure that strips out volatile items such as food and energy, rose from a yearly increase of 3.8 percent in May to 4.5 percent in June.

The inflation figure had investors, economists and policy makers scrutinizing the reading in the middle of a debate about the risk of runaway consumer prices, fueled by ultra-accommodative fiscal and monetary policy. Looking at the numbers it is apparent that price jumps have so far been most significant in sectors directly affected by the coronavirus pandemic. The highest driver being prices of used cars which have soared due to a semiconductor shortage, semiconductors are an essential component in building new cars, and the shortage made new cars scarce, driving the soaring demand to the limited used car market. Fed Chair Jerome Powell has repeatedly invoked used car prices as evidence for the temporary nature of the current inflation surge.

Other factors having a hand in the rising figures included travel related expenses such as airfare, hotel prices and car rental costs, all rising due to lockdowns being loosened. Energy prices also surged as Americans shook off pandemic restrictions and took to the roads again. Fed officials had predicted in June that their preferred gauge of core inflation would rise by 3 percent this year before mellowing down to 2.1 percent in 2022. But Tuesday’s reading saw economists believing that the surprisingly high inflation could pressure the regulator to consider slowing monetary stimulus by reducing asset purchases sooner than previously though. The Biden administration has previously expressed confidence that the surge in prices would subside, and continued to defend that view after the data were published. The White House’s Council of Economic Advisers on Tuesday stressed in a series of tweets that, outside of disruptions related to the pandemic and supply chain issues, core CPI had risen by 0.22 percent month over month, relative to 0.28 percent in May and 0.31 percent in April. “We’re at a place where a set of pandemic related services are still normalizing their prices back to where they were before the pandemic. We’re in a world where we see a very concentrated bottleneck around autos, and everything else in the core series we’re seeing deceleration,” a White House official said on Tuesday.

A day following the release of the US inflation date, Federal Reserve chair Jerome Powell testified in front of the Congress, where he fended questions from Republicans and Democrats alike, in a bid to ease concerns over the Fed’s response to surging inflation. Powell pushed back against suggestions that the regulator might be complacent about inflation risks, saying that the Fed was ready to act if needed to tame prices and that he sympathized with public concern over rising prices. “I know people are very worried about inflation, we hear that loud and clear from everybody, it is really going through the economy and through every business,” said Powell.

Powell largely stuck to his view that the inflation increases would be transitory and will eventually subside. Powell did not break any new ground on monetary policy during the three hour hearing, he reiterated that the central bank would continue discussions later this month on reducing its $120bn in monthly asset purchases, and that the Fed is not yet debating a rise in its main interest rate from its rock bottom level.

Powell sought to strike a balance between accepting that the inflation readings had caught the fed offguard so far, while also stressing that the big picture had not changed. He said “It is still the same story. It is still the same parts of the economy that are producing this inflation. It is a pretty narrow group of things that are producing these high readings, but we are anxious like everybody else to see that inflation pass through.” He also urged lawmakers to have “faith” in the Fed’s judgment that it was still riskier to tighten policy too early than too late. “We really do believe and virtually all forecasters do believe that these things will come down of their own accord as the economy reopens - it would be a mistake to act prematurely.”

Kuwait

Kuwaiti dinar

USD/KWD closed last week at 0.30055