15/02/2022

Broad Based Inflation in the US

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Introduction

While in the first half of 2021 price increases were concentrated among relatively few items within the CPI basket, like energy or car prices, price increases have become much more widespread recently. Notably, goods and services inflationary pressures are manifesting themselves alongside nominal wage increases.

Authors: Filippo Cartiglia & Rahil Ram

Once again, US consumer price inflation accelerated to a new high since 1982. In January, US Consumer Price Index (CPI) inflation reached 7.5% year-on-year (YoY), with core inflation (excluding food and energy) accelerating to 6.0% YoY. While in the first half of 2021 price increases were concentrated among relatively few items within the CPI basket, like energy or car prices, price increases have become much more widespread recently.

Price increases have been broad based in the US, with all components posting significant increases.
Source: Bloomberg LLP, Fulcrum Asset Management LLP

Reflecting the extent of broad-based pressures on inflation, in January the median CPI, which is the one-month inflation rate of the component whose expenditure weight is the fiftieth percentile of price changes, increased in line with the overall CPI, at 0.6% on the month.

Source: Cleveland Federal Reserve

Notably, goods and services inflationary pressures are manifesting themselves alongside nominal wage increases. In the 2-year period from January 2020 to January 2022 the CPI index has increased by a cumulated 9.0%, accelerating by 5 percentage points from a cumulated 4.0% increase in the previous 2-year period from January 2018 to January 2020. With a striking similarity, average hourly earnings have increased by a cumulated 11.3% in the 2-year period from January 2020 to January 2022, also accelerating by 5 percentage points from a 6.3% cumulated increase in the previous 2-year period from January 2018 to January 2020. It looks like a price-wage spiral is happening already.

Source: Bloomberg LLP, Fulcrum Asset Management LLP

With expansionary policies – very sizable government budget deficits largely financed by printing money – but still hesitant aggregate supply of both goods and labour, we do not find it too surprising that consumer prices and wages are moving together, feeding on each other. Buoyant demand for goods and services leads to a combination of higher consumer prices, higher demand for labour, higher employment, and higher nominal wages. In turn, higher employment and wages lead to higher incomes and therefore higher demand for goods and services. And higher wages lead firms to increase prices. At the same time, as current prices are rising, expectations for further price increases gather speed among firms and workers, thereby pushing up prices and wages even more.

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About the Author

Filippo Cartiglia

Filippo is a member of the Investment Team. Before joining Fulcrum in 2020, he was the chief economist at Arrowgrass Capital Partners LLP. Prior to this, Filippo was Managing Director at Goldman Sachs, partner at Newman Ragazzi LLP, and an economist at the International Monetary Fund in Washington. Filippo graduated from Bocconi University in Milan in 1988 and gained a PhD in Economics from Columbia University in New York in 1992.

About the Author

Rahil Ram

Rahil Ram is a Director at Fulcrum Asset Management and is involved in portfolio strategy, portfolio implementation, research, sustainability and idea generation for the discretionary macro and thematic strategies. Prior to joining Fulcrum, Rahil was a strategist within the Asset Allocation team at Legal & General Investment Management for five years, during which time he completed his Masters’ in Actuarial Management from Cass Business School and qualified as an Actuary in 2017.

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