Foreign exchange financial news: US inflation remains high: July CPI up 8.5% year-on-year

On August 10, according to data released by the U.S. Department of Labor, the U.S. CPI rose 8.5% year-on-year in July, unchanged from the previous month. In June, the US CPI index increased by 9.1% year-on-year, which may mean that the historical inflation in the United States has cooled slightly, but it still remains high.

 

The core CPI index excluding energy and food prices rose by 5.9% year-on-year in July and 0.3% month-on-month, and the month-on-month increase was slightly lower than that in June by 0.2%.

 

Despite a slight improvement in inflation data in July, the Fed has not stopped raising interest rates. Yesterday, Chicago Fed President Charles Evans said the Fed may need to raise policy rates further. Previously, the Fed's target of raising interest rates was to reach 2.25%-2.5% by the end of this year, while Charles Evans believes that interest rates need to reach 3.25%-3.5% and reach 3.75%-4% by the end of next year.

 

 

Previously, the Fed has raised interest rates by 75 basis points twice in a row, and has raised interest rates by 225 basis points since March. The market expects that the Fed will continue to raise interest rates, but it is expected to slow down.

 

However, for this historic high inflation, the Fed raising interest rates is only a solution to the symptoms but not the root cause. To curb inflation, it is necessary to identify the focal point and prescribe the right medicine.

 

On the face of it, this inflation is the result of a combination of factors including tight supply chains, a push by high costs and a rebound in demand.

 

Specifically, first, the impact of the new crown epidemic and the Russian-Ukrainian conflict has caused shortages of manufacturing parts, decreased production, reduced orders, and delayed delivery, affecting the supply and demand of goods; second, the world logistics system has not yet recovered from the impact of the new crown epidemic in 2020. This has resulted in low global logistics efficiency and high prices for transportation services; third, the inevitable "green and yellow gap" in the energy transition process of Western countries has widened the gap between supply and demand of energy; "Release water", stimulate the economy, and make social demand rebound quickly. Since March 2021, the global import trade index has exceeded the export trade index, which means a strong recovery on the demand side.

 

 

However, all countries in the world are currently facing these three major problems, but the inflation in Western countries continues to "fever", and there are deeper reasons behind it.

 

In fact, a rebound in demand does not necessarily lead to inflation. If the government implements good supply management policies, the impact of rebounding demand on prices will be hedged.

 

However, since the Great Depression at the end of the 1930s, the theoretical basis of economic macro-control in Western countries is still Keynesianism. Keynesianism holds that a deficit in aggregate demand leads to a deficit in aggregate output, so consumption and investment should be stimulated if the level of output is to be increased.

 

Although the "stagflation" of the 1970s challenged Keynesianism, it still prevailed. Whenever the economy faces the risk of recession, the government chooses to strongly stimulate demand. However, after the outbreak of the new crown epidemic, the supply side of the economy has been severely impacted. Instead of regulating supply and production, rationally allocating resources, and allowing more production input in areas where prices are rising rapidly, Western countries continue to vigorously stimulate social demand. To make the already imbalanced supply and demand relationship even more deformed is tantamount to fighting fires with paychecks.

 

In addition, the fixed model of "big water release" whenever there is a problem makes the consumption of the public and private sectors of Western countries account for a large proportion of GDP. This has forced the government to continue to stimulate demand in order to prevent a "consumption collapse" that could affect elections.

 

However, the long-term stimulus has expanded the government's fiscal deficit and debt scale, and the government's debt pressure is increasing day by day. Therefore, if the central bank aggressively raises interest rates, the pressure on the public sector and the private sector to repay debts will inevitably increase sharply, thereby impacting asset prices and affecting employment and economic recovery.

 

 

In addition, the central banks of Western countries have not strengthened their position as "as independent as possible from the authorities", but actively cooperated with the authorities' stimulus policies and purchased a large amount of government bonds, allowing a large amount of liquidity to enter the consumer sector through the government, thus becoming a hidden danger of inflation. .

 

The recent "de-globalization" trade and international relations policy orientation that has been rampant has made the already "scarred" supply chain even worse. According to the Peterson Institute, if the overall U.S. tariff is cut by 2%, inflation is expected to fall by 1.3%.

 

Therefore, the central bank can play a very limited role in the high inflation that has not been seen in 40 years, and cannot play the role of "governance protagonist". In fact, "the bell must be tied to the bell." If the governments of Western countries still ignore the balance of the supply side, stimulate the demand side blindly, and continue to hinder the restoration of the world market order, then inflation will be difficult to ease. The central bank's aggressive rate hikes will only drag the economy into the abyss of recession.