Macro Insights Weekly: Taking stock of the hot US inflation reading


US inflation is running hot, with headline, core, PPI all rising at rates not seen in decades. Such developments complicate politics and risk market selloff.
Taimur Baig, Chang Wei Liang15 Nov 2021
  • Strong demand, supply side disruptions, and labour shortage are driving up prices
  • We expect core PCE inflation to be around 3% in 2022, on top of an average of 3.2% this year
  • Demand would moderate next year, with negative fiscal impulse and Fed policy lift-off
  • Supply side disruptions should also ease
  • Still, the fixed income market may be too sanguine, with real yields in deep negative territory
Photo credit: Unsplash


Commentary: Taking stock of the hot US inflation reading

US inflation is running hot; the producer price index (PPI) was up 8.6%yoy in October, hovering around the highest print in over a decade. The consumer price index (CPI) was up 6.2%yoy during the same period.

Inflation has also become broad-based; the widely followed core personal consumption expenditure (PCE) index is running at 3.6%, highest reading in decades. Energy and food prices have been a drag for a while, but now, owing to strong demand and myriad supply side disruptions, durable goods prices have begun to firm. Labour shortages are pushing up service charges and wages, which would likely add momentum to prices.

We measure momentum by annualising the latest 3-month over 3-month reading. That analysis suggests that the worst of inflation pressure may be behind us (especially core inflation), but it is still high by historical standards, with major political and macroeconomic policy implications.

The public responds adversely to higher gasoline and food prices, which complicates the political space. Hence the Biden administration is taking measures to ease supply side constraints, from releasing fuel from the US strategic reserves to keeping ports open 24/7. It has also been amenable to scale back the scale of the two landmark legislations in train. 

Regardless of the size of the forthcoming stimulus measures, US fiscal impulse will turn negative by 2022, as many of the emergency support measures expire. The Federal reserve will be tapering asset purchases and will be hiking rates in Q4,’22, in our view. With marginal tightness in fiscal and monetary policy in play for next year, and many of the prevailing supply side bottlenecks likely to ease, the outlook for inflation does not look dire, or policy does not seem behind the curve, in our view. We expect core PCE inflation to be around 3% in 2022, on top of an average of 3.2% this year, but that would still leave 10-year inflation in line the Fed’s objective of 2%/year. The risk is the rather sanguine fixed income market, where real yields are too low, in our view.


To read the full report, click here to Download the PDF.


Taimur Baig, Ph.D.

Chief Economist - Global
taimurbaig@dbs.com

Chang Wei Liang

FX & Credit Strategist, Global
weiliangchang@dbs.com


Subscribe here to receive our economics & macro strategy materials.
To unsubscribe, please click here.

The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR

Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.