Lots of gasps and expressions of incredulity accompanied Wednesday’s news that US CPI inflation jumped 1.1 per cent in June to a year-on-year figure of 5 per cent. The monthly gain is the largest since 1982 and the headline rate is now higher than at any time since 1991.
Oh, and Wall Street economists had only been expecting a gain of 0.7 per cent over the month.
But we should probably get used to this number surprising on the upside in the short term. US CPI has been flattered over recent months by favourable seasonal adjustments – adjustments that turn unfavourable for the rest of the year.
Surprise, surprise – gasoline prices are key. Even if the real price at the pump remains static from here, the adjusted price for CPI purposes will continue to rise at an alarming rate, as this projection from John Kemp at Sempra Metals shows:
Mr Kemp reckons the headline CPI rate will have breached 6 per cent by year end:
Two decades of the Great Disinflation has been wiped out. But the major western central banks have been reduced to the role of helpless spectators. With mortgage credit evaporating, house prices sinking rapidly and the banking system under more strain than any time since the 1930s, rate rises have become unthinkable for the generation of post-Volcker central bank officials.
The Fed and other central banks derive some comfort from the fact that wage rises remain moderate so the risks of inflation becoming embedded in the economy are reduced. But the consequence of rapid inflation and sluggish wage growth is a sharp drop in real household incomes which will push the major economies towards recession in H2 2008 and H1 2009 even without interest rate increases.
Ultimately, an actual or prospective recession in North America and Western Europe looks set to cut commodity demand and rebalance commodity prices over the next 12 months even if interest rates remain at current levels.
Related links
Consumer Price Index Summary – US Department of Labor
US inflation in biggest monthly jump since 1982 – FT.com