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US: Fed’s inflation indicator hits 40-year high

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Personal income rose less than 0.1% in January, while consumer spending rose 2.1%. The increase in personal income primarily reflected an increase in workers’ compensation, partially offset by a decline in state benefits. The personal savings rate (ie, personal savings as a percentage of disposable personal income) was 6.4% in January compared to 8.2% in December. Inflation measured by PCE rose to 5.2% year-on-year in January. That was above the median economist forecast for 5.1%, an acceleration in December’s reading of 4.9%. On a monthly basis, the core PCE inflation rate was 0.6%, above the median forecast of 0.5%, and slightly above the December inflation rate of 0.5%. In January, real disposable income decreased by 0.5% and real PCE increased by 1.5%; goods rose 4.3% and services rose 0.1%. The savings rate has essentially returned to its pre-recession levels and will see a sharp drop in January as income growth falls and spending rises.

 

According to other data, durable goods orders increased by 1.6% in January compared to the previous month. This was an acceleration against the 1.2% monthly earnings pace in December, which saw a major overhaul of -0.7%. We continue to check for disruptions to the economic conditions of the Omicron variant, and more importantly to the supply chain and inflation situation. Indicators are likely to turn a little more negative in February. This comes with reinforcement of the expected March FOMC rate hike based on recent Fed comments, but uncertainty remains to put the possibility of a more aggressive 50 basis point hike at the next meeting in dilemma.

 

Consumers ignored omicron concerns in January as Covid cases peaked rapidly earlier in the month. Services have been affected to a lesser degree by previous waves of Covid. The growth profile is not at a point of concern and PCE is also in an uptrend as expected. On the other hand, the erosion effect will continue in real incomes, because there is an oil price that goes above 100 dollars together with geopolitical risks. In the dilemma of growth and inflation, the risks of slowdown and high inflation are challenging the central banks, and at this stage, the Fed’s projections for a 50 basis point rate hike in March have been somewhat withdrawn. It seems more likely that it will return to the classic 25 basis point scale.

 

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The global market was caught between geopolitical risks and the sidewinds of inflation concerns, and we were increasingly following hawkish central bank expectations. The fact that Fed communications since January’s CPI surprise show that the FOMC has not abandoned its view that inflation will come down on its own makes it unlikely that the committee will start a rate hike with a 50 basis point increase in March. But more bad news about inflation is on the way. Rising Russia-Ukraine tensions brought oil prices closer to $100 per barrel. If Russia continues its actions, energy prices may rise further as the March FOMC meeting approaches. Will the rise in energy prices push the Fed to act more aggressively? This is the basic question, but geopolitical balances also introduce risks regarding the speed of the economy. The escalation of the Russia-Ukraine conflict could result in a negative mix of even higher energy prices, tighter financial conditions, and a negative confidence shock – all related to the Fed’s thinking about the appropriate pace of tightening.

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