The latest inflation figures for the US raise the risk of faster monetary tightening by the US Federal Reserve next year, posing a threat to some emerging markets, which are already grappling with currency depreciation, accelerating inflation, and rising interest rates. Firms serving the US market should monitor inflation figures for categories relevant to their industry and product lines, for clues about pass-through and pricing strategy in an inflationary environment.
The headline US consumer price index rose 6.8% YOY in November, marking the fastest increase since 1982. Prices rose 0.8% MOM, a touch slower than the previous month’s 0.9% increase, which still points to strong inflationary pressures.
Although the 6.8% headline figure was in line with market expectations, inflation has regularly surprised to the upside throughout 2021 and is now broad-based across spending categories. Energy prices were up 33% YOY in November (with gasoline prices up 58% YOY), while food prices rose 6.1% on the year. Core inflation, which excludes volatile food and energy components, accelerated to +4.9% YOY. Other major contributors to annual inflation were used cars and trucks (+31.4% YOY), new vehicles (+11.1% YOY), household furnishings (+6.0%) and apparel, where prices jumped 1.3% from the previous month.
High and rising inflation is now a politically salient issue in the US, as consumers increasingly feel the effects of higher prices for a wide variety of goods and services. This report is likely to increase pressure on the Federal Reserve to advance its timeline for asset tapering and rate increases. The calculus has changed for several reasons. Whereas the Fed could argue earlier this year that rising inflation was driven by “transitory” factors related to pandemic reopening and energy shortages, prices are now rising across nearly all spending categories, which points to an inflationary undertow that the Fed may be compelled to act on. In the last month, positive data has also assuaged concerns about the labor market, which strengthens the case for tightening monetary policy. Barring a near-term economic downturn driven by another COVID-19 wave or the Omicron variant, the Fed is likely to complete its asset tapering in spring 2022, and begin raising rates in Q2 or Q3 2022.
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