Throughout 2021, the word transitory was iterated countless times by various central bankers across the world. The term was a failed prediction that the spike in inflation we have all been experiencing will be short-lived.
At the end of November, when the Consumer Price Index, CPI, was at 6.8% Year-Over-Year, YoY, Jerome Powell, the Chair of the Federal Reserve, announced it is a good time to retire the term transitory.
What is the Federal Reserve?
The Federal Reserve is the United States' central bank, making them the most prominent actor in the monetary system, which decided to lower interest rates to all-time lows and print $120bn a month for over 18 months until November 2021, after which they slowly slowed the pace of monthly money printing, which is expected to finally stop at the Fed's next meeting on 15th-16th March.
Where are we now?
The CPI has further shot up to 7.5% YoY in January and is expected to have increased by 1.3% in the first two months in 2022, starting from an already astronomically high base.
Central bankers are claiming that the inflation situation will improve by year-end, but that is more hopeful than calculated. In fact, as I will outline, there are countless indicators that paint a bleak and ominous picture ahead...
- Import-Export prices
Export prices for the US were an eyewatering 14.7% YoY in January 2022. They increased by a shocking 2.9% in January alone. The highest number on record.
Import prices are also concerning. 10.8% YoY and up 2% in January. Remember that the Fed aims for 2% inflation in a year.
- ISM manufacturing and non-manufacturing prices paid
Another inflation indicator has been screaming.
For the service sector, 4 out of the 5 all-time highest data points for prices paid came in the last 4 months!
Manufacturing prices paid are also unsettling. Higher than forecast 18 out of the last 23 readings. Beat estimates by 11% in February.
- Producer Price Index (PPI)
Another indicator that is fundamental to overall inflation goes under the radar.
9.7% YoY vs 9.1% YoY expected in January, alongside an increase of 1% for the month vs 0.5% expected is shocking.
Every time I look at the oil charts I want to throw up. Undoubtedly, Russia's invasion of Ukraine has caused a spike in the price of oil due to potential sanctions, but WTI's price was up 40% from December until before Russia's invasion due to supply-demand imbalances. It is now up 87% since the beginning of December and 32% over the last 6 trading days. Scary stuff.
The price of oil is the highest in over 13 years and has much more room to go, the effects will reverberate across global economies.
- Russia sanctions
The sanctions on Russia are undoubtedly inflationary, given that they export oil and gas, fertilisers, and other precious metals.
- Trade deficits
The seemingly ignored trade deficits data perfectly ties up the argument for more inflation.
The U.S. Goods Trade Balance came in at -$101.4bn for the month of January, the worst number on record, revealing that the US economy is incapable of domestically producing what they consume. This is the worst it's ever been and it will continue to get worse, especially considering that transportation costs for goods from abroad are going to rocket from an already sky-scraping height.
This is particularly dangerous considering that the Fed is reducing monetary accommodation, dampening economic activity, at a time when inflation is accelerating, dampening the economy.
When looking at the economy, inflation is simply one aspect of the equation. Another side relates to economic activity, or Gross Domestic Product, GDP. If GDP is increasing at a faster rate than inflation, that is generally positive for the economy.
As I will explore in my next article, the growth prospects for the U.S. economy are concerning for the Fed, which will be left with a catch-22 situation regarding their monetary policy.