The June release of inflation data from the Bureau of Labor Statistics showed that the consumer price index (CPI) increased by 2.9% over the past 12 months. This is the highest level of inflation since February 2012.
In addition to being higher than the fed funds rate, the rate of inflation now also exceeds the rate of wage growth by the widest margin since 2012.
These signals of mounting inflationary pressure put a bigger focus on monetary policy.
The Fed is now seven rate hikes and tens of $billions into its policy normalization process. In June it raised the Fed funds rate from 1.75% to 2% and further trimmed its balance sheet, bringing the nine-month cumulative reduction to $160 billion.
In one sense this is a meaningful amount of activity; in another, however it’s not. At 2%, the Fed funds rate is still 280 bps below its 20-year pre-crisis average. Moreover, while a $160 billion reduction is large on a nominal basis, it’s still less than 4% of the nearly $4.5 trillion the Fed started with.
With wages and inflation trending higher, investors will be closely watching to see if the Fed’s normalization efforts have been too little and too late to keep inflation in check.
Unless otherwise noted, data is sourced from Bloomberg.
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