Dr Debesh Roy, Chairman, InsPIRE
The U.S. consumer inflation surged ahead to touch a more than four decades high of 8.6% annual rate in May 2022, due to spiraling energy and food prices. There has been no respite from the upward movement of retail inflation in the US since February 2021, which had a benign reading of 1.7% to 5% in April 2021, followed by a steady 5.3-5.4% during July-September, when the Federal Reserve Chair Mr. Jerome Powell was convinced that inflation was transitory in nature. However, October (6.2%) onwards inflation continued to rise unabated touching a 40-year high in March 2022, followed by a slight drop to 8.3% in April, before rising to 8.6% in May 2022 (see figure below). The core-price index increased 6% in May, down from 6.2% in April. March’s 6.5% rise was the highest rate since August 1982.
High inflationary trend is a downside of strong growth in the US, sparked by low interest rates and government stimulus to counter the Covid19 pandemic’s impact, followed by elevated energy and commodity prices due to the Russia-Ukraine crisis. Further, price pressures are strong across much of the US economy partly due to an unusually tight U.S. labor market, with demand for workers outstripping supply.
The rise in May inflation was driven partly due to sharp rises in the prices for energy (34.6%) from a year earlier, and groceries (11.9%). The surge in inflation belied hopes among some analysts about the nearing of peak inflation, primarily due to further rise in energy prices, as a result of the prolonged Russia-Ukraine conflict, and a steady rise in services-related costs, mainly those linked to the travel industry.
The US Federal Reserve seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Accordingly, the Federal Open Market Committee (FOMC) had decided to raise the target range for the federal funds rate to 3/4 to 1% at its May 04, 2022 meeting, while anticipating that ongoing increases in the target range will be appropriate. With the May inflation print at more than 40-year high, Ms. Lael Brainard, the vice-chair of the Federal Reserve, has warned that the US central bank may need to extend its run of half-point rate rises into September if inflation does not slow sufficiently in the coming months.