Opinion | Why is the Fed said to be the initiator of high inflation?

The high inflation since the beginning of the epidemic in the United States is caused by the extreme mismatch between supply and demand by the US government, with the support of the Federal Reserve’s massive expansion of its balance sheet. Compared with the subprime mortgage crisis in 2008, the proportion of U.S. debt purchased by the Federal Reserve after the epidemic increased from 16.9% to 57.1%. The stimulus to the economy is strong and fast, avoiding the liquidity trap and reaching residents and enterprises directly. need. From 2020 to 2021, the average monthly savings rate of residents will be as high as 14.1%, a significant increase of 6.5 percentage points from 7.6% in 2019.

However, due to overly aggressive policies and high inflation, until now, US residents still have about $2.6 trillion in excess savings, supporting the demand side to maintain resilience in the short term. Against the backdrop of ineffective repair of supply chain problems and high housing prices, wages and energy prices, U.S. inflation is expected to fall slowly, with inflation in 2022 hovering around 7.6%.

The Fed cooperates with the Treasury Department to boost demand, stimulate the economy, and weather the crisis together. The Fed provided key support to the Treasury, boosting demand but boosting inflation. After the new crown epidemic in 2020, the scale of the Fed’s purchase of US bonds far exceeded that during the international financial crisis in 2008, allowing the Ministry of Finance to distribute cash and subsidies to residents on a large scale and with high intensity. In the two years after the COVID-19 outbreak, the Federal Reserve expanded its balance sheet on a large scale and purchased U.S. bonds, contributing 57.1% of the new share of U.S. bonds during the same period, while foreign investors contributed 13.6%; by comparison, after the 2008 international financial crisis In the past two years, the Fed’s contribution to new U.S. debt was only 16.9%. The direct cash distribution and subsidies from the Ministry of Finance have significantly improved households’ balance sheets and avoided liquidity traps, resulting in a strong rebound in the demand side, superimposed supply blockages, and ultimately leading to a year-on-year inflation rate (CPI) from 1.4% in January 2021 , all the way up to 8.3% in April 2022.

Resident savings are still at a high level, and some commodity prices still have room to rise in the short term. In terms of durable goods, residents still have about $2.6 trillion in additional savings, supporting demand to remain resilient in the short term. However, it is difficult to change the state of weak supply chain repair during the year, and it is expected that the prices of automobiles and parts will still have room for improvement in the short term. For non-durable goods, the prices of gasoline and other energy products are mainly affected by global crude oil prices. Looking ahead, if there is no large-scale rebound in crude oil supply, crude oil prices are likely to remain high and fluctuate, restricting the speed of inflation.

Prices of housing prices, wages, and energy support services. Under the services of the PCE price index, housing, transportation, entertainment and dining are the main drivers. Among them, housing and transportation items have higher weights, and their pull on the PCE price index is relatively large. Looking ahead, we believe that housing inflation still has room to rise in the short term, but against the backdrop of a continuous recovery in housing supply and a jump in mortgage interest rates, it is expected that housing inflation will fall back in the fourth quarter. In transportation , firstly, the large gap between labor supply and demand boosts wages, and secondly, crude oil supply and demand are still in a tight balance, driving energy prices to remain high and fluctuating. It is expected that transportation prices will remain high during the year.

During the year, U.S. inflation was limited and remained at a high level. Under the benchmark scenario, commodity demand will remain resilient in the short term; on the supply side, supply chain repairs will continue to be weak, leading to a slight upside in some commodity prices compared to the previous month; in terms of services, it is difficult to improve in the short term in terms of wages, energy and housing prices. In the context of , service prices are still supportive of inflation. Therefore, in the base case, although the year-on-year growth rate of overall inflation (CPI) has started to fall in April, the rate of decline will be relatively slow. The inflation level in 2022 will be around 7.6%.

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