USA CPI Inflation Soared 6.2%, Stock Markets Under Pressure, Assets Rise

Economic activities have started to gain momentum in the USA after the immediate impacts of Covid-second wave started to ease. However, the country has failed to control its inflation rate every month, for a long time.

CPI Inflation data

In the latest report, the Labor Department of USA reported that the consumer price index (CPI), has increased by 6.2% in October from a year ago, which is the highest since December 1990.

Dow Jones earlier estimated the CPI to be at 5.9%. On a monthly basis, USA's CPI has increased 0.9% against the 0.6% estimate. CPI is a basket of products including gasoline and health care to groceries and rents, and an increase in energy costing has led to this worse than expected CPI data, in more than 30 years. The country's annual core inflation was at 4.6%, compared with the 4% expectation and the highest since August 1991.

Sector-wise inflation

The major reason behind this inflation is fuel oil prices surged 12.3% for the month, part of a 59.1% increase over the past year. Energy prices have increased 4.8% in October and are up 30% for 1 year. Food prices significantly hiked 0.9% on the month and 5.3%, for the year respectively, while in the food category, meat, poultry, fish, and eggs collectively gained by 1.7% for the month and 11.9% year over year. Used vehicle prices on the other hand contributed significantly, by increasing by 2.5% on the month and 26.4% for the year. Additionally, new vehicle prices increased by 1.4% and 9.8%, respectively.

However, in another report, the Labor Department mentioned that the country's real wages after inflation dropped by 0.5% from September to October, and the product of a 0.4% hike in average hourly earnings.

Equity markets react

The Fed should take immediate action to keep the inflation rate controlled. As a reaction to the latest CPI report, the equity markets edged down, while the US dollar gained marginally. In Asian markets, including India also stock markets performed under pressure. Sensex dropped in around 600 points.

Gold markets on the other hand reacted positively. Gold rates in the global markets crossed the $1855/oz level after a long time today.

Fed monetary policy

For a very long time, US Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen along with Chicago Federal Reserve Bank President Charles Evans were concerned about this surge in inflation, that has been impacted the Fed monetary policy. The Fed is trying to keep the inflation rate controlled within 2%, but failing repeatedly in months.

US Fed has recently announced that they will start tapering by $15 billion per month, but skeptical about the interest rate hike. However, analysts are worried that this inflation is not at all transitory now, and can soar more, in absence of an interest rate hike. However, the Fed is not ready to hike the interest rate soon because of the poor employment situation coupled with pressured economic activities.

An interest rate hike is expected in the USA after 2022.

Analyst's comments

Commenting on the matter, in an interview, Steve Hanke, professor of applied economics at Johns Hopkins University told Kitco News, "Inflation could go higher and the main thing is persistence. The CPI and inflation are driven by the money supply growth. And, we've had a massive amount of excess money created by the Fed since the Coronavirus pandemic hit." Hanke additionally thinks that the current problem is not solely due to supply chain bottlenecks.