While consumer prices jumped more than expected in May, experts believe the surge in inflation may be temporary. They also say it shouldn’t push the Fed to tighten policy. Why do they believe that rising prices are temporary? Well, they say it’s because those increases are centered in areas impacted by the COVID-19 pandemic.
Inflation is hotter than expected, but it looks temporary and likely won’t affect Fed policy yet
Consumer prices jumped more than expected in May, but the surge in inflation looks to be temporary and should not push the Federal Reserve to tighten policy for now.
The consumer price index rose 5% in May on a year-over-year basis, the highest since the summer of 2008, when oil prices were skyrocketing. Excluding food and energy, core CPI rose 3.8% year over year, the highest pace since 1992. A third of the increase was attributed to a sharp 7.3% increase in used car and truck prices.
Fed officials have described the current period of high inflation as transitory, meaning it should be brief or short-lived. They have expected several months of elevated price increases because of pent-up demand and supply chain lags. The comparison to last year’s weak levels — at a time when the economy was mostly shut down — is also a factor.
“The pick-up in inflation is stronger than expected, but it still looks like it is in transitory categories,” said John Briggs of NatWest Markets. ”[Fed officials] can probably get away with talking about transitory.”
The Federal Reserve meets June 15 and 16. There was some market speculation that if inflation looked very hot, the central bank might move up the time frame in which it would discuss moving away from its easy policies.
Economists expect the first step toward easing would be when the Fed publicly discusses its decision to cut back on the $120 billion in Treasury and mortgage securities it buys each month.
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Reuters via Fox Business/Jim Wyckoff
Fed balance sheet tops $8 trillion for first time
The Federal Reserve’s balance sheet topped $8 trillion for the first time, weekly data published on Thursday by the U.S. central bank on its holdings showed.
The report also showed the Fed appears to have sold around $160 million of its corporate debt holdings since Monday, following the announcement it would unwind its nearly $14 billion corporate credit portfolio. As a first step, the central bank began selling its stakes in 16 bond exchange-traded funds on Monday.
The Fed’s credit facility was just one of many emergency measures launched last spring to shore up financial markets badly shaken by the coronavirus pandemic’s rapid spread and disruption to the economy. While the Fed’s backstop restored liquidity to the credit market, the facility was ultimately little used and the sale of its holdings is not expected to have serious effects on the market.
Keep reading, here.
CNN Business/Julia Horowitz
Climate, taxes and China: Investors are watching the G7
As leaders of most of the world’s largest economies gather in Cornwall, England, expect political fanfare and lots of attention on US President Joe Biden, who is seeking to reassert America’s dominance on the global stage.
But there are plenty of issues up for discussion among the Group of Seven — which includes Canada, France, Germany, Italy, Japan, the United Kingdom and the United States — that could have major ramifications for investors and businesses.
You can read up on those issues, here.