By Swann Collins, investor, writer and consultant in international affairs. Eurasia Business News – May 14, 2022

Times Square, Manhattan, New York City- Photo credit : Swann Collins

U.S. annual inflation hit 8.3% in April, slowing down from previous figure, when inflation reached record 8.5% in March on annual terms, after 7.9% in February. This remains a high level of inflation never seen in the United States since April 1981 and the dynamic has been here for months. U.S. inflation already reached 7.5% in January after hitting 7% in December 2021, 6.8% in November and 6.2% in October.

The U.S. Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in April on a seasonally adjusted basis after rising 1.2 percent in March, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 8.3 percent before seasonal adjustment.

Increases in the indexes for shelter, food, airline fares, and new vehicles were the largest contributors to the seasonally adjusted all items increase. The food index rose 0.9 percent over the month as the food at home index rose 1.0 percent. The energy index declined in April after rising in recent months. The index for gasoline fell 6.1 percent over the month, offsetting increases in the indexes for natural gas and electricity.

The index for all items less food and energy rose 0.6 percent in April following a 0.3-percent advance in March. Along with indexes for shelter, airline fares, and new vehicles, the indexes for medical care, recreation, and household furnishings and operations all increased in April. The indexes for apparel, communication, and used cars and trucks all declined over the month.

The all items index increased 8.3 percent for the 12 months ending April, a smaller increase than the 8.5-percent figure for the period ending in March. The all items less food and energy index rose 6.2 percent over the last 12 months. The energy index rose 30.3 percent over the last year, and the food index increased 9.4 percent, the largest 12-month increase since the period ending April 1981.

Food prices increase

The food index increased 0.9 percent in April; this was its seventeenth consecutive monthly increase. The index for food at home rose 1.0 percent after rising 1.5 percent the prior month. Five of the six major grocery store food group indexes increased over the month. The index for dairy and related products rose 2.5 percent, its largest monthly increase since July 2007. The index for nonalcoholic beverages also rose sharply, increasing 2.0 percent over the month. The index for meats, poultry, fish, and eggs rose 1.4 percent as the index for eggs increased 10.3 percent in April.

The food at home index rose 10.8 percent over the last 12 months, the largest 12-month increase since the period ending November 1980.

Basic services prices increase

The main problem is that inflation in basic services has risen for four consecutive months. Services prices rose 0.7% in April, after gaining 0.6% in March, 0.5% in February and 0.4% in January. On annual terms, services prices increase by 4.9%.

Energy prices are stable

The energy index declined 2.7 percent in April after rising 11.0 percent in March. The gasoline index declined in April, falling 6.1 percent after increasing 18.3 percent the prior month. (Before seasonal adjustment, gasoline prices fell 1.0 percent in April.)

The other major energy component indexes increased in April. The index for natural gas rose 3.1 percent and the index for electricity increased 0.7 percent. The energy index rose 30.3 percent over the past 12 months. All the major energy component indexes increased over the year. The gasoline index increased 43.6 percent and the fuel oil index rose 80.5 percent since April 2021. The index for electricity rose 11.0 percent, and the index for natural gas increased 22.7 percent over the last 12 months.

The U.S. Fed fueled inflation

Since the start of the coronavirus crisis in February-March 2020, the U.S. Federal Reserve has injected the markets with 120 billion US dollars in liquidity each month, through the purchase of 80 billion treasury bills and 40 billion MBS. To briefly say it, the Fed has printed 120 billion of US dollars each month for more than 18 months. High inflation is a logical consequence.

On March 16, 2022, amid annual inflation in February hitting 7.9%, never seen since January 1982, the Federal Reserve started to admit its mistakes and approved a 0.25 percentage point rate hike, the first increase since December 2018. This brings the federal funds rate now into a range of 0.25%-0.5%.[1] The move will correspond with a hike in the prime rate and immediately send financing costs higher for many forms of consumer borrowing and credit.

By raising its rates, the Fed forces the banks to increase the rates they offer to their customers for the financing of a house, a car or any consumer good.

In a rare move, the U.S. Federal Reserve approved a 0.50% interest rate increase on May 4 and announced plans to shrink its $9 trillion asset portfolio starting next month, in an effort to tackle a 8.5% inflation in annual terms, a record since January 1982.

The moves, announced after a two-day policy meeting of central bankers Wednesday, will raise the Fed’s benchmark federal-funds rate to a target range between 0.75% and 1%.

Fed officials indicated the rate increases will come with slower economic growth this year. The Federal Open Market Committee also projected roughly six more rate hikes in 2022, along with slower growth and higher inflation.

The U.S. regulator pointed to necessity of further tightening its monetary policy. Jerome Powell, calling inflation in the U.S. “too high”, before denying its lasting character in Autumn 2021, said that the possibility of an equally significant rate hike will be considered at the next two meetings. It was also announced that on June 1, the reduction of assets on the Fed’s balance sheet, “inflated” during the easing period, will begin – within three months.

As of today, the Fed’s balance sheet stands at $8.2 trillion. Three-quarters of that increase, or $3 trillion, was created over a period of about 12 weeks last year.

It seems that the massive quantitative easing and the asset purchase program carried out by the Federal Reserve since 2008 have caused out-of-control inflation and that U.S. central bankers now fear the burst of the real estate and stocks bubbles they have created.

Read also : How to invest in gold

Amid high inflation and real estate bubble, some investors invest in gold to protect their purchasing power.

The Consumer Price Index for May 2022 is scheduled to be released on Friday, June 10, 2022 at 8:30 a.m. (ET).

The Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. The CPI reflects spending patterns for each of two population groups: all urban consumers and urban wage earners and clerical workers.

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© Copyright 2022 – Swann Collins, investor and consultant in international affairs.