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Are US inflationary pressures broadening?


US Inflation updates

Are US inflationary pressures broadening?

The latest consumer price index is released on Tuesday, giving policymakers and investors fresh insight into how persistent a concern higher US inflation will become.

Consumer prices have shot higher this year, with the pace of annual gains hovering around a 13-year high as of July. On a month-to-month basis, price increases have moderated somewhat, but now the focus is shifting to whether sectors beyond those most sensitive to pandemic-related disruptions, which have so far driven the bulk of the higher inflation prints, are starting to register higher gains.

Consensus forecasts compiled by Bloomberg predict a 5.3 per cent year-over-year increase in the CPI index for August, right in line with the 5.4 per cent pace recorded the previous month. From July, prices are expected to have risen 0.4 per cent, down from 0.5 per cent during the previous period. Stripping out volatile items like energy and food, “core” measures are set to be 4.3 per cent higher than in August 2020.

Line chart of Year on year change in CPI (%) showing US inflation has picked up strongly

“Within the CPI release investors will be looking to see the shift from transitory factors toward more sustainable cost increases via a widening of the categories pressing higher,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets.

Analysts at RBC Capital Markets said they are watching housing-related prices closely. “One area that is ripe to begin lifting in earnest is the shelter component,” they wrote in a recent note, referring to a measure of rental levels.

“As we have said over recent months this sector will provide a sturdy floor beneath core prices in the months to come as prior home price increases feed through”, they said.

“That is not something that will move higher with a burst, rather it will show gentle sequential acceleration and then remain somewhat elevated,” the analysts added. Colby Smith

Is the iron ore price slump over?

After a storming start to 2021, iron ore has gone from commodity leader to laggard.

At $160 a tonne in January, the steelmaking raw material surged to a record high above $230 a tonne in May before retreating sharply and finishing last week at $128.75, according to S&P Global Platts.

Erik Hedborg, lead iron ore analyst at consultancy CRU, says the same factor that was driving prices higher earlier in the year is now driving them down — Chinese demand.

“In the second quarter we saw record strong Chinese steel production, he said. “Now we are seeing demand not vanish but drop quite rapidly.”

There are two reasons for lower demand. One is declining margins at Chinese still mills. This is in part because of lower steel prices and record domestic prices for coking coal — the other ingredient needed to make steel.

At the same time, Beijing, which wants to hold steel production flat at just over 1bn tonnes this year, is now taking a more active role in curbing output as the year end comes into view.

“What we are hearing is that the largest steelmakers in China are being targeted a little bit more in terms of reducing output because they were overproducing in the first half of the year,” said Hedborg. 

Many of these big steelmakers are sitting on excess iron ore inventory, which they are now looking to sell to smaller producers. That in turn means any time a major iron ore producer has extra volumes to sell in the spot market there are very few bidders. 

With supplies from Australia and Brazil set to increase into the year end as the southern hemisphere enters the summer, traders have braced themselves for further weakness given the iron ore price still remains above its 13 year average of $106 a tonne. Neil Hume

Is the UK labour market overheating?

In the earlier stages of the pandemic, policymakers’ chief concern was to avoid mass unemployment. Now, the Bank of England is more worried that labour shortages could fuel inflation, if they result in companies raising pay and putting up prices. This week’s jobs data will be a critical piece in the puzzle for investors trying to work out how soon the central bank might start scaling back stimulus.

Last month’s figures showed unemployment had fallen to 4.7 per cent in the three months to June, with vacancies running at record highs and wage growth picking up. Since then, there has been mounting evidence that employers in many sectors are struggling to hire, with acute shortages emerging in areas such as truck driving, food processing and certain skilled roles in construction.

But there are also signs that some jobs could still be at risk as the government winds down wage subsidies and other support schemes. Although there has been no marked rise in redundancy consultations yet, official figures show that 1.6m workers were still furloughed in mid-August, and an increasing share of them older or employed by small businesses.

The Bank of England says unemployment has already peaked, but some economists think it is bound to rise when subsidies end, despite high vacancies, because it could take time for workers to find their way into new jobs, especially if some need to retrain.

Tuesday’s data will show whether there was any initial impact on jobs and wages in July, the month when the furlough scheme began to taper and when most restrictions on economic activity ended. Delphine Strauss

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