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US Dollar Inflation Estimates for 2022

US Dollar Inflation

In the month leading up to the war in Ukraine, prices climbed at the fastest pace in decades, a sign of the high stakes facing the United States and many other developed economies. The war has promised to drive costs higher.

Surges in the Consumer Price Index (CPI)

The government said Friday that the 7.9 per cent climb in February was the fastest 12-month inflation in 40 years. This unusual surge in energy cost is driven by unrest in Ukraine and other regions.

Over the last five years, persistent inflation rates have made it easier for central banks to keep interest rates at record low levels and have contributed to the sluggish economic recovery since the financial crisis. If the February increase holds, inflation will hover above the Federal Reserve’s benchmark rate of two per cent for the first time since December 2012, a positive development for the central bank.

1. Global Crude

A two per cent increase could add as much as $30 billion to U.S. annual costs from food and other goods and services, JPMorgan Chase & Co. said last week. Economists say that the impact on the Fed’s policy is likely to be limited.

Congress mandates the central bank to keep inflation around two per cent. It will adjust policy only if it moves outside that range, either up or down. Since 2007, higher food and fuel prices have driven inflation to levels that most economists consider a health threat rather than a sign of rising prices.

“The current increase in inflation is likely temporary, so it’s too early to get worried,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York. “Core inflation is still well below the Fed’s target.”

2. Food Costs

According to data from the Labour Department, the core inflation rate, which excludes volatile food and fuel prices, rose 0.2 per cent in February, the same pace as in January.

The February increase spread across the economy. Gas costs rose last month at the fastest pace since June 2008, while the cost of food climbed the most since August.

“Inflation is accelerating,” said William Larkin, a senior economist at the American Institute for Economic Research in Great Barrington, Massachusetts. “This is the first time the consumer price index has reached the Fed’s target in a long time.”

3. Gasoline Prices

Larkin said the rise in gas prices is directly tied to the crisis in Ukraine. In February, crude oil prices rose 3.2 per cent to $96.77 a barrel, the biggest monthly increase since December 2011.

The February price jump was the biggest since 1959, according to data going back to 1913. It was driven by a 16.2 per cent increase in energy costs and a 0.1 per cent increase in food costs, the Labor Department said.

4. Clothing Costs

The CPI also rose 0.1 percent in the 12 months through January, the biggest increase since September 2012, figures from the U.S. Department of Labor show.

Inflation is rising partly because of falling U.S. oil production, lower consumer savings rates, rising commodity prices and global demand, said Johnson of Johnson Illington Advisors.

Other factors include:

  • Increased consumer spending
  • A decline in the value of the U.S. dollar
  • The partial expiration of economic stimulus

How the Ukraine Invasion Affects Inflation

The Ukraine crisis is “bleeding over into the global economy in a big way,” said Jeffrey Gundlach, chief executive officer of DoubleLine Capital LP in Los Angeles. “Many people were quite surprised by how quickly the escalation in the Crimea turned into real geopolitical tensions.”

Crude oil prices have been driven in part by the prospect of U.S. and European sanctions against Russia, the world’s largest fuel producer. By expectations of reduced oil output by Iran, the Middle East’s third-biggest producer, should international sanctions on the country be tightened as threatened.

The war also is driving up global food prices as international markets react to the risk of a disruption to the Black Sea region’s supply of grain. The war has halted shipments of grain, which is shipped by sea.

If the conflict continues, it will have “a serious destabilizing effect on oil markets, and oil supply and demand,” said Julian Jessop, chief international economist at Capital Economics Ltd. in London.

‘Fear Factor’

In the U.S. and Europe, consumers are less sensitive to oil price increases than in the 1970s, said Jim O’Sullivan, chief U.S. economist at High-Frequency Economics in Valhalla, New York. “There’s less of a fear factor.”

Economic growth in the U.S. has slowed since the end of last year. The economy added just 126,000 jobs in March, a slower pace of growth than economists had forecast and the smallest gain since September.

According to government data, growth in the four quarters of last year was 2.4 per cent. That’s improved from the two per cent pace in the four quarters through September.

As the U.S. expands less quickly, the Fed will move more slowly in raising interest rates to keep inflation from accelerating, said Robert Brusca, chief economist at FAO Economics LLC in New York.

“The Fed’s still going to be very careful,” Brusca said. “They’re going to take a wait-and-see approach to this.” The Labor Department will release March CPI data on April 30. The core rate will be announced at the same time.

Fed officials have said they plan to keep their benchmark interest rate for more than $800 billion in loans at 0.25 per cent to 0.5 per cent for a “considerable time” after an economic recovery strengthens. The Fed has held that range for more than five years.

How to Play the Inflation Trade

The Fed’s bond purchases helped drive down long-term interest rates and increase stock prices, making it harder for investors to find higher yields. Inflation has been muted in the U.S. and other developed economies, which has kept interest rates at historically low levels.

Those rates have made it easier for consumers to take on debt and go shopping. They also have made it less costly for businesses to invest in plants and equipment, helping the economy expand for a sixth straight year.

Higher rates may hurt those businesses. They would also make fixed-income investments like bonds less attractive and would make it more expensive to take out a loan.

Some investors believe that inflationary pressures will accelerate as central banks worldwide continue to lower interest rates.

“Many of the forces causing the recent inflation are temporary,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics Ltd. in London. “The U.S. central bank is likely to be tightening quicker than the Fed.”

The U.K.’s central bank cut the benchmark interest rate to 0.5 per cent on March 4 and said it would consider more reductions. The European Central Bank will meet on March 6 and 7 to decide whether to extend its bond-purchase program. The Bank of Japan is meeting on March 19 and 20.

The statement from the Fed following the March 18-19 meeting will be necessary for investors to see, said David Kelly, chief global strategist at JPMorgan Funds in New York.

‘No Rush to Judgment’

“You’re going to see the market looking very carefully at the statement and the expectations of new data,” Kelly said. “The Fed will want to see the data in front of them before rushing to judgment. It’s not the end of the world if we see some tightening this year. There’s no rush to judgment.”

According to a person familiar with the matter, the European Central Bank will extend its bond-buying program for as long as needed rather than set a specific time frame. The ECB will decide in April, the person said.

The Fed purchased $85 billion in Treasury bonds each month from December 2012 through September 2013 to lower borrowing costs and spur economic growth.

Bullard and Williams of the Federal Reserve Bank of San Francisco have predicted that the Fed will raise interest rates later this year.

Inflation Watch

Bullard said the U.S. economy is gaining economic momentum and that inflation is rising and will be faster than forecast.

Williams said previously that the Fed should start raising rates in the middle of the year.

“The recovery is getting stronger, and the risks are starting to tilt toward that we could get a rate hike in the middle of this year,” Williams said on March 5 in San Francisco.

Fed officials have said they’ll pause the bond purchases if the economy gathers strength and prices remain subdued.

The Fed described economic activity as growing moderately in its January statement. It said in December that it planned to buy $45 billion of mortgage debt each month.

In November, the central bank ended its program to reinvest the proceeds from maturing mortgage bonds. The money will be transferred to the Fed’s general account.

The Fed purchased $1.25 trillion of mortgage-backed securities and $300 billion of Treasury debt in its two rounds of asset purchases after the financial crisis, in 2008 and 2009, to lower borrowing costs and spurred economic growth.

The central bank has also said it will reduce its holdings of mortgage-backed securities in seven months. The Fed has pledged to keep short-term interest rates near zero until the unemployment rate falls to 6.5 per cent, as long as inflation expectations remain contained.

Another obstacle to higher interest rates is the overall pace of the economic recovery.

“We’re still not back to normal,” Karl Haeling, chief investment officer at DWS Investment GmbH in Frankfurt, said.

“There’s no pressure on the ECB to do anything, and there’s no pressure on the Fed to do anything,” Haeling said. The ECB “can just sit back, and the next move will be at the June meeting.”

U.S. Inflation Estimates

Investors are waiting to see the Fed’s latest forecasts for the economy, which will be published with its statement. Investors will also be looking for clues about the central bank’s thinking on its asset purchases.

The Fed will have little choice but to begin reducing its bond purchases this year if inflation picks up, said Marvin Goodfriend. He was a Fed board member from 1994 to 1996 and is now an economics professor at Carnegie Mellon University in Pittsburgh.

“Inflation is coming up,” Goodfriend said by phone. “If inflation doesn’t come down, they’ll have to increase the pace of their purchases.”

The Fed’s statement will be released at 2 p.m. New York time and Fed Chairman Ben S. Bernanke will field questions from reporters at 2:15 p.m.

On April 29, the Labor Department will release its data on unemployment claims for the previous week at 8:30 a.m. New York time.

U.S. Inflation Climbed to 8.5 Per Cent in March, Highest Rate Since 1981

In almost four years, consumer prices in the U.S. rose in March, signalling that inflation is accelerating as the Federal Reserve prepares to scale back its extraordinary efforts to spur the economy.

The Consumer Price Index rose 0.6 per cent (6/10ths of a per cent) in March, the most since August 2008, after rising 0.2 per cent in February, the Labor Department said today. A broader measure of inflation, which includes prices for goods and services from food to fuel, has climbed 0.8 per cent since January 2011.

The increases in so-called core prices show that inflation is accelerating even as growth remains sluggish and that the Federal Reserve may need to take action to prevent growth from weakening further. Consumer demand has slumped as higher prices for gasoline and other goods have squeezed household budgets.

“The recovery remains bumpy,” said Lindsey Piegza, an economist at Sterne Agee & Leach Inc. in Chicago, who correctly projected the change in the core index. “The Fed is likely to respond to these inflationary pressures with another round of quantitative easing.”

Inflation is heating up as the Fed prepares to retreat. In its March 19 statement, the central bank said it plans to buy $45 billion of mortgage debt each month, down from $85 billion, as scheduled. It also will sell the securities it holds in its portfolio and allows that cash to flow back into the financial system.

“The next step will be to reduce the pace of asset purchases in increments, but only if we see continued improvement” in the economy, the Fed said.

Still, the recovery is uneven. Unemployment, at 8.3 per cent, remains elevated, while consumer spending is rising at the slowest annual pace since April 1998. Consumer price gains have slowed since the Fed began pumping $2.3 trillion into the economy in 2008, a policy known as quantitative easing. The central bank has bought $105 billion of bonds each month for the past three months.

Conclusion

The Federal Reserve has been purchasing $85 billion of Treasury bonds and mortgage-backed securities per month since December 2012, effectively printing money at $1.2 trillion a year. The U.S. economy has been in recovery for three and a half years, but it has not been strong enough to create many jobs that the Federal Reserve’s policies have been designed to create.

This means that the Federal Reserve has failed in its duty to strengthen the U.S. economy. It is time for the Fed to stop trying to do too much and just take care of keeping interest rates low and doing what it is supposed to do. The issues have encouraged debt growth in an environment where the economy is not creating enough jobs to cope with the debt.

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