Consumer prices in the US are climbing at their fastest rate in 30 years, with petrol and food prices leading the charge.
Increases in goods including eggs, meat, cereals and vegetables, along with climbing petrol prices triggered a monthly increase of 0.9 per cent in October.
That increase also reflects a significant jump from the September 0.4 per cent inflation rate, and spooked international markets. The Nasdaq, S&P 500 and Dow Jones all closed in the red on Wednesday.
The price increase was “broad-based”, with consumers feeling shocks across the food, shelter, energy and new-and-used vehicles indexes.
The energy index alone rose 4.8 per cent while the gasoline index increased 6.1 per cent.
It means energy prices in the US are now up 30 per cent on where they were in 2020, and food prices are 5.3 per cent higher.
Supply-chain issues, lockdown, winter driving increase
A confluence of factors including global shipping bottlenecks, a cold winter - and a corresponding energy supply-demand mismatch - and the international emergence from lockdowns, are driving the increase, AMP Capital senior economist Diana Mousina told Yahoo Finance.
At the same time, the end of rental eviction moratoriums are pushing prices for shelter up, while limited scope for international travel has also seen the vehicle indexes increase.
And it’s unlikely to abate anytime soon.
“There are reasons to think that some of the supply-chain issues have probably peaked for now, but it doesn’t mean that we’ve reached a peak … in inflation numbers though,” Mousina said.
“Over the next six months, we’ll see some easing in the supply constraints for durable goods around the world [as there are] less COVID closures.
“But in the post-COVID world, and the reopening world, inflation is going to be higher than it was.”
That’s largely due to persistently higher energy prices, and higher wages.
That’s partly as Australia approaches summer while North America and Europe edge nearer to a potentially brutal winter, and associated energy price rises.
And while Australia has marked higher petrol prices, domestic inflation isn’t occurring with the same breadth of categories as America, Mousina said.
“When you look at the CPI basket, inflation has definitely gone up since last June, but it’s not at a level where you would be concerned about it yet.”
She predicts that over the coming year, spending will shift away from durable goods and into services as pent-up consumer demand breaks free.
‘Vicious cycle’ could emerge
However, GSFM investment strategist Stephen Miller said the US Federal Reserve had “consistently” underestimated inflation throughout 2021, and that the US economic situation had similarities to the 1970s endemic inflation.
In the 1970s, oil-supply shocks led to inflation and, in turn, increasing wages and prices. Over a 20-month period, the US stock market lost nearly 50 per cent as monetary policy - designed to generate full employment - also triggered high inflation.
“The parallels with the 1970s are incomplete,” Miller said.
“However, it is perhaps fair to say that the current global inflation spurt has more in common with that time than in any intervening period.”
“In this context, there are grounds for a less-sanguine view of inflation than naively assuming it away as ‘transitory’.”
He said the 1970s highlighted that poor monetary policy responses to supply-driven inflation shocks had the capacity to deepen the problem.
“There are embryonic indications that a ‘vicious circle’ mechanism of higher prices feeding higher expectations is at work,” Miller said.
“The notion of transitory inflation is that it doesn’t change wage and price-setting behaviour.
“But there is growing evidence that these behaviours are changing: companies feel more confident to increase prices because prices are going up everywhere, while workers are naturally seeking higher wages in those areas of the economy where skill shortages are acute.”