Daily Commentary BY THE CURVE TEAM –

US Inflation Surges

13th of May, 2021

Inflation in the US sparks concerns that central banks may have to change tune.

April inflation was well ahead of market expectations, rising 0.8% for the month and 4.2% annually. The annual rise is mostly explained by the pick-up in prices from the sharp falls during covid.

The monthly rise on the other hand reflects the current environment. Even core inflation was up 0.9% for the month and apart from food and energy 97.7% of categories saw rises in prices.

A combination of surging demand from stimulus cheques and lockdowns being unwound as well as supply bottlenecks are driving prices higher. Cars and truck prices, which rose 10% for the month and contributed 30% to the monthly price rises, is indicative of this.

A lack of chips has restricted the production of cars on the supply side, and domestic travel and commuting as more people move to the suburbs since covid has lifted demand. Beyond cars and trucks, retail inventories to revenues are at record lows and there is a shortage of containers for shipping.

The Fed point to these as reasons why the recent rises will prove temporary. They believe that as supply constraints ease and production picks up that prices will revert to lower levels.

If supply is slower to respond and demand is sustained then the Fed’s guidance of not raising interest rates until 2024 will be under pressure. They will have to decide the point at which they deem inflation sufficient to tighten policy.

The Fed’s decision will have ramifications on Australia, as tightening policy in the US will mean there is less upward pressure on the Australian dollar. Therefore there is more justification for the RBA to tighten as well.

Josh Stewart

Associate - Money Markets