US Inflation – a light at the end of the tunnel?
Consumer price inflation in the US has accelerated significantly in 2022. In June it hit the highest level recorded since 1981. However, the QuantCube US CPI Nowcast, based on alternative data analysis, suggests that at the beginning of July 2022 it may have hit a plateau at an elevated level, with decelerating motor fuel prices giving a respite for US policymakers.
What is driving inflation in the US?
The QuantCube CPI Nowcast Indicator measures the Consumer Price Index at a country level in real-time by collecting prices for different baskets of goods and services. These datasets are then crossed and aggregated based on their contribution to the structure of household consumption. In Exhibit 1 we show the evolution of the QuantCube US CPI Nowcast and its subcomponents. We observe that US inflation has been rising since the last quarter of 2021 and accelerated to more than 9% between May and June 2022.
US inflation has been fueled by a disequilibrium between two factors: 1) the post-pandemic recovery and the consequent demand shock, and 2) disrupted supply chains from the Covid-19 crisis. It has also been exacerbated by Russia’s invasion of Ukraine, which has caused additional inflationary pressure with supply shortages in energy, food, and raw materials.
The conflict between Russia and Ukraine has been particularly important for US inflation in recent months. As shown in Exhibit 2, the Transport subcomponent of the QuantCube US CPI Nowcast accelerated 24% between May and June 2022, and as a result it became the main contributor to the acceleration of the indicator during the period.
Decelerating energy prices may ease the pressure on the US consumer price index
The acceleration of the Transport subcomponent from May to June 2022 was largely driven by motor fuel prices. They accelerated from a 48% year-on-year variation at the end of May, to a peak of 59.2% year-on-year variation on July 2, as shown in Exhibit 3.
However, it seems that US motor fuel prices have reached an inflection point in the last ten days. The evolution of the West Texas Intermediate (WTI) Crude Oil price gives support to this trend. As shown in Exhibit 3, the WTI price has fallen by approx. 20% since the beginning of June 2022. This period witnessed increasingly bearish financial markets with growing concerns for an imminent recession in the US and Europe, while the relentless Zero-Covid policies in China increased the uncertainty over its growth prospects. In addition, the efforts by the Biden administration to increase oil supply may start to pay off in the near future. In our opinion, these events will keep a downward pressure on oil prices, although further sanctions on Russian oil exports – which may lead to additional disruption to oil supplies – remain a distinct possibility.
Our research indicates that prices at the pump in the US typically follow crude oil prices with an average delay of three weeks. Therefore, we expect the recent decrease in motor fuel prices to keep following the downward trend of crude oil prices, thereby reducing the pressure on US inflation.
Conclusion
Inflation in the US remains significantly above the Fed’s 2% long-term inflation target. So far, the Fed has reverted to quantitative tightening and hiked interest rates to deal with the situation. However, monetary policies generally have a limited effect on handling supply shocks and can only do so at great cost to domestic demand. Therefore, with the motor fuel prices potentially reaching a peak, the Fed will have more room to pursue its objectives.
