US inflation still runs hot

Supply driven inflation problems leave the Federal Reserve with limited choices

11 May 2022

It is still running very hot, although perhaps not quite as hot as last month’s print but inflation at 8.3% year-over-year still makes uncomfortable reading for policy makers. The estimate was for a quicker deceleration in the inflation data with forecasts pointing to 8.1% as both core and headline CPI rose ahead of market estimates. Looking deeper into the components of the inflation report and some areas stand out as opportunistic price gouging with airline fares rising 18.6% on the month, although it is evident that energy price rises are driving both consumer and corporate behaviour now. What is also clear is that the Federal Reserve is patently behind the curve and probably should be reacting more aggressively but as we have always said, policy choices at this point of a very strange economic cycle are quite limited. Supply driven inflation problems are not resolved by monetary policy alone – businesses need to take up the baton and over-produce to alleviate high prices. Equity markets will struggle while they try to second guess corporate and monetary policies which seem to be flying on a wing and prayer at the moment.