U.S. Inflation Hits 6.8% ... How Will The Fed React ...

Markets were braced for a rise in U.S. inflation. November data revealed a near forty year high. The headline CPI rate increased to 6.8%.

New car prices increased by 11%. There were significant hikes in energy and gas costs. Prices were rising in household furniture and appliances. Fast food prices were up by 8%. The core measure of inflation and food was up by 4.9%.

Inflation is widespread in many sectors. In our work, we make much of the seismic shock to the economy. The tectonic plates of demand and supply shifted out of balance, causing supply shortages and escalating material costs.

In the US, the economy has also been subject to a Tsunami of dollar waves from cash injections into US households. The boost to domestic incomes has boosted the demand for goods. This "helicopter money" has created the Tsunami of dollar waves following the tectonic shift in supply and demand.  Inflation is rising higher than we expect to be the case in the UK. We will find out more on this next week!

The Fed has retired the word "transitory" from the central bank vocabulary. Powell is under pressure to get the policy and messaging right. Officials have had to accept their expectations for inflation have missed the mark.

As we explained in this week's Friday Forward Guidance, the Fed is expected to accelerate "tapering". We now expect the process to be completed by the end of the second quarter. This would leave the way open for two rate rises at least, before the end of 2022.

Markets are accepting the process of monetary tightening is underway. For the moment, there appears to be no prospect of a "taper tantrum". G-7 finance leaders will meet on Monday to discuss rising inflation and the appropriate central bank reaction function.

The focus of policy is moving away from protecting jobs, to protecting standards of living and curbing the rise in prices. It may well be a coordinated move to push rates higher. Travel plans for 2022 may include the escape from Planet ZIRP.  Cancellation insurance always advisable ...