US inflation comes in hotter than expected in July

US inflation come in higher than expectations in July and is still running above historic levels, according to official figures released today.

US inflation hit 5.4 per cent annually in July, the same rate recorded in June, according to the US Bureau of Labor Statistics.

Monthly inflation cooled to 0.5 per cent from 0.9 per cent in June.

Economists had expected annual inflation to edge down slightly over the last month to 5.3 per cent.

Prices for new cars anchored price rises in the US due to manufacturers passing on higher costs caused by a deepening global semiconductor shortage. Prices at the pump were the biggest contributor to inflation, with gasoline costs up 2.4 per cent over. Transport prices fell 1.1 per cent over the same period.

There were signs that inflationary pressures could persist for longer, as easing price rises for some good and services were offset by rises for other products, such as energy and restaurant costs.

A resurgence in global demand as economies emerge from Covid measures has put supply chains under severe pressure to scale production to meet new orders. Many suppliers are struggling to reach pre-Covid levels of production, causing prices to spike for commodities and raw materials.

Businesses are competing with each other to secure inputs amid widespread shortages, putting further upward pressure on prices.

Ambrose Crofton, global market strategist at J.P. Morgan Asset Management, said: “While a good amount of inflation can be attributed to these temporary factors, there are signs that underlying price pressures that could prove more persistent continue to build.”

Flat-lining inflation will provide headaches for the Federal Reserve after the central bank came under intense pressure to start signalling how it intends to wind down its ultra-loose monetary policy position following an over-decade high inflation figure in June.

The Fed held interest rates at a record low of between 0 per cent and 0.25 per cent and left their bond buying programme unchanged at their latest Federal Open Market Committee meeting.

The Fed highlighted that the US “economy has made progress” but signalled it is unlikely to tighten monetary policy to rein in inflation until the American jobs market is near to full employment.

“Today’s inflation print is the latest in a string of strong economic releases that should raise the pressure on the Federal Reserve to announce the tapering of its asset purchases sooner rather than later,” Crofton added.

There are concerns that severe worker shortages in some sectors of the US economy are failing to clear, fuelling fears that inflation may continue to rise in the long term if firms have to hike wages for to attract workers.

However, the US economy added 943,000 jobs last month, indicating the jobs market is recovering strongly from the worst effect of the Covid crisis.

Two Federal Reserve officials said on Monday that inflation is already at a level that could satisfy one leg of a test for the beginning of interest rate hikes – though a third, Charles Evans, downplayed the comments on Tuesday.

Wall Street does seem to agree with the Fed’s view that price rises are being driven by transitory factors which should end as global supply chains revert to pre-pandemic operations.

However, the tech-heavy Nasdaq has taken hits as a result of higher yields. Higher interest rates tend to put downward pressure of stock prices due to fixed income investments becoming relatively more attractive.

The Bank of England last week predicted CPI inflation in the UK is likely to reach at least four per cent by the end of year, double the Old Lady’s target.

Andrew Bailey reiterated that the Bank believes the spate of sharp price rises are merely transitory and should ease once supply chain constraints level off.

However, he did point to severe mismatches in the labour market that are proving to be more stickier than first thought. He said clearing these mismatches would be pivotal to driving down inflation.

The Bank of England also lowered the threshold at which it will start to tighten monetary policy in the first move to rein in accommodative measures unleashed in response to the Covid crisis.

Officials on Threadneedle Street said they would stop reinvesting the proceeds made from holdings of government and corporate date once the base rate hits 0.5 per cent.

The threshold was previously 1.5 per cent.