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US inflation hits 40-year high at 9.1%

The menace of inflation bedevilling the world economies appears to have taken full grip of the US economy at the present moment, with little chances of escape from recession. This is confirmed by the US inflation rate hitting forty years high in June at 9.1%, as seen in the CPI data report released this week. Investors received the most significant shock on Wednesday after the US CPI report, the trusted inflation gauge for the US economy, gave the highest reading unseen in over four decades. The last time such a high record was seen was in December 1981, during the economic crisis, when the inflation rate reached 10.3%.

The CPI rose to 1.3% MoM, marking a 0.3% increase from the previous record of 1.0% recorded in May. The CPI data MoM is currently at forty years high also.

A mild increase was recorded in the Core CPI at 0.7% MoM marking a 0.1% increase from the 0.6% recorded the previous month. This shows that the primary cause of the inflation came mainly from the food and energy sector, further supported by the core CPI YoY, which reduced to 5.9% YoY from the previous record of 6% and the forecast of 5.8%.

This is very understandable as the prices of oil rose vigorously in June after the bans on Russian oil importations by the G7 during their meeting.

The CPI YoY has risen so high to 9.1% YoY in June. Much higher than the forecast of 8.8% and the previous record of 8.6% in May.

Food and energy prices have risen to a record high in the US, and the Fed's series of interest rate hikes since April seems not to have solved the problem as imagined. Probably incapable of doing so immediately as some critics believed: due to the high inflation rate or maybe because the hiking is insufficient. According to analysts' observations, inflation is currently heating up rather than cooling down. This means more work needs to be done by the Fed during their next session.

The cost of living in the US has increased, and citizens are blaming the government for not solving the problem. Some critics blame the Fed for a slow response in hiking the interest rate or rather not doing enough as many suppose. This leads us to consider the question: Will the Fed hike the interest rate in July? Well, we shall discuss this in the next paragraph that follows.

Would the Fed hike the interest rate in July?

Indeed, it will be a gainsay of the reality to assume that the Fed will slow down on their rate of interest rate hike in July. The Fed's open position from the FOMC meeting minutes two weeks ago was released. The Fed will do more to ensure inflation is tamed. It becomes unnecessary to ask again if they will do so in July, given the high rate of inflation witnessed in June. Inflation has not peaked and seems imminent in the US economy. The Fed will be expected to act more this time. President of the San Francisco Federal Reserve Bank, Mary Daly, hinted interest rate hike for July would be by 75 basis points, and a 100 basis point hike is still possible. Supporting this position, the President of Richmond Federal Reserve Bank - Thomas Barkin, expressed his support for higher rates hiking during the last meeting. Loretta Mester submitted that "The data on CPI does not suggest a rate hike in July any smaller than that in June."

Should the Fed decide to go with a 100 basis hike this time, it will mark the highest interest rate hike in the history of the US. However, the pertinent question is: will another aggressive interest rate hike from the Fed this time salvage the economy, or will it increase hardships and unemployment? This is a second important question many analysts have been asking, as they suppose the Fed might be getting it wrongly this time. Economists fear the series of interest rate hikes would not solve the real cause of the inflation. The high cost of energy and food will throw the country into recession sooner than forecasted.

Nonetheless, US President Joe Biden believed that the CPI data given for June is currently 'out of data' as gas prices have fallen drastically in July. This means the CPI report to be expected for July is likely to come lower. Oil prices have fallen below $100 per barrel since July. The current price of Crude oil is $93.40 during the Asian session today, against the high records of $120 witnessed in June. This massive decline shows that the July CPI will likely come lower as Biden predicted. Will this cause the Fed to slow down on the interest rate hike in July? We will find out during the next Fed session in the coming week.

How would a further interest rate hike in July impact the dollar index?

The series of interest rate hikes in the previous months have pushed the dollar index (USDX) to a twenty years record high above 108.4.

Further interest rate hike up to 75 basis point and above will likely push the dollar index so high with the target of 112.0 and above. This will throw the forex market into an experience unseen for more than thirty years. Of course, prices of other currencies, including cryptocurrency and commodities, would crash further should the Fed embark on another aggressive interest rate hike in July.

Last Updated: 15/07/2022

This market commentary and analysis has been prepared for ATFX by a third party for general information purposes only. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell as it does not take into account your personal circumstances or objectives, and should therefore not be interpreted as financial, investment or other advice, or relied upon as such. You should therefore seek independent advice before making any investment decisions. This information has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. We aim to establish and maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps to prevent conflicts of interest from constituting or giving rise to a material risk of damage to the interests of our clients. The market data is derived from independent sources believed to be reliable, however we make no representation or warranty of its accuracy or completeness, and accept no responsibility for any consequence of its use by recipients. Reproduction of this information, in whole or in part, is not permitted.


 

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