Stuck On Repeat

Image source: Jon Moore @thejmoore - Unsplash Emilia Ennessy, Flipser - Shutterstock

What's going on?

Fresh data out Wednesday revealed the most widely watched US inflation rate refused to budge from a 13-year high last month.

What does this mean?

With demand rebounding, supply bottlenecks continuing, and the country’s government pumping trillions of dollars into the American economy, consumer prices were 5.4% higher in July 2021 than they were in July 2020 (tweet this). That was a slightly bigger rise than economists had anticipated – and unchanged from the previous month’s inflation rate, the largest such surge since 2008.

Looking behind the headline figures, however, the “core” US inflation measure – which excludes unstable food and energy costs – eased slightly to 4.3% last month, compared to 4.5% in June. Price rises also relaxed on a month-on-month basis: goods and services were 0.5% more expensive in July than a month before, down from June’s chunky 0.9% gain.

Why should I care?

For markets: Flattening the curve.
Taken together, the figures suggest that US inflation may have peaked – potentially vindicating the Federal Reserve’s view that recent upticks are only temporary and that pandemic-related shortages will eventually evaporate. That could leave America’s central bank in little hurry to increase interest rates or start scaling back its $120 billion-a-month bond-buying program. Since the latter would remove a major source of demand for US government bonds, relieved investors bought more of them on Wednesday – pushing their yields, which move inversely to prices, lower.

The bigger picture: Let ‘er rip.
Whether inflation has indeed peaked remains hotly debated. Government support has played a major role in recent price rises, and there may be much more to come: the US Senate passed a $3.5 trillion budget blueprint on Wednesday, just a day after approving a roughly $1 trillion infrastructure spending package. That brings both plans one step closer to reality – along with their injection of near-unprecedented levels of government funding into the American economy.

Originally posted as part of the Finimize daily email.

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