,The Federal Reserve (Fed), who sees the current high inflation as transitory, has not precisely defined the term. Its notes only revealed that it generally expects elevated inflation for the remainder of 2021 and foresees inflation to moderate in 2022.
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UNITED STATES consumer prices jumped more than expected in May, up 5.4% on a year-on-year (y-o-y) basis, the highest since the summer of 2008, when oil prices were skyrocketing.
Excluding food and energy, core consumer prices rose 4.5% y-o-y, the highest pace since 1992. A third of the increase was due to a sharp 7.3% rise in used car and truck prices.
However, the surge in consumer prices has been described as transitory.
This means the current upward pressure on consumer prices should be brief or short-lived. We are of the view that transitory period should be between six and nine months.
The Federal Reserve (Fed), who sees the current high inflation as transitory, has not precisely defined the term.
Its notes only revealed that it generally expects elevated inflation for the remainder of 2021 and foresees inflation to moderate in 2022.
It also implies that elevated inflation will stay for several more months. However, not all the Fed policymakers are of the same view. Some believe that inflation may linger further into 2022.We have factored in several months of elevated prices. The comparison to last year’s weak levels – when the economy was mostly shut down – is a factor. The low base effect is one important driver of the current surge in inflation.
Driven by subdued 2020 inflation, we are seeing inflation catch-up in 2021 and normalising in 2022. This would mean that although inflation may remain elevated, the base rate effect will calm inflation over the coming months, just as comparatively, inflation picked up off low levels towards the end of 2020.
The other narrative on the upward inflationary pressure comes from the supply bottlenecks. As we are seeing in many countries, the main driver of inflation is supply bottlenecks. These take place as the economy reopens. Paired with robust consumer demand i.e. “pent-up demand”, these will put upward pressure on prices. Again, we are of the view that these unusual disruptions to the economy will start to moderate in 2022 as global supply chains work out their current issues and pent-up demand fizzles.
Driven by the narratives of low base, supply bottlenecks and pent-up demand, currently there is no expectation that the Fed will raise rates in response to the inflation surge. The Fed is more likely to start re-pricing the policy rate sometime in 2023 onwards as opposed to 2022. Instead, the Fed will start tapering in 2022.
What could change the Fed’s outlook?
In our view, the first step towards any change on the Fed’s outlook would be when it publicly discusses the decision to roll back the US$120bil (RM507bil) in Treasury and mortgage securities it buys each month. This is the quantitative easing programme that was designed to create liquidity and keep interest rates low.Once the Fed has started to discuss its quantitative easing programme, we expect the Fed to adopt a wait-and-see stance for a few months before beginning a gradual rollback on its bond-buying until it gets to zero.