US Inflation (Part 2) and New Economic Reality

After the data on the US consumer inflation, published on Wednesday, yesterday the markets doomily expected the numbers on the industrial inflation. It is doomily because if in the case of consumer inflation it was possible to count on a moderate rise in prices, then there was no hope at all with the production inflation against the background of many years of records in the commodity markets and even historical highs for a number of goods.

As a result, the year-on-year growth was 6.2%. 3 times higher than the Fed's target(!). This figure has once again reminded that economic laws have not disappeared and continue to function. Now all eyes are on the Fed.

In the meantime, the markets are waiting for the Fed's reaction, let's talk about the new economic reality, or rather, why the US economic recovery will most likely not meet the markets' expectations.

During the pandemic, whole parts of the economic mechanism, if not out of order, then were already upset. For a number of assets required for economic recovery, problem areas have formed.

Consider, for instance, the latest NFP numbers. The data came out almost 4 times worse than forecasts, not because there were problems on the demand side (on the contrary, the number of open vacancies is breaking records). The problem was in the supply of the labor market: the level of participation in the US labor force did not come close to the pre-pandemic levels. As a result, 10 million jobs have not returned to the economy, yet, and will clearly not return in the near future.

But there is still a shortage of chips that will slow down entire industries (for example, automakers will produce tens of billions of dollars less because of this in 2021). The sharp rise in timber prices is hampering the recovery of the construction industry. A shortage of packaging materials and a sharp rise in prices for them will become a problem for retail. And there are many more such examples.