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The cloud of inflation hangs over the U.S. economy, while a wave of strikes sweeps in, leaving the Fed in an unprecedented predicament. This article will provide an in-depth analysis of the reasons behind the inflation data and strike waves, as well as their impact on the US economy and monetary policy.
Iteration of inflation data: economic instability
Inflation is no longer news in the US, but the latest CPI data disappointed the market.
Inflation once showed a downward trend, but the July rebound reignited market concerns. The US CPI rose 3.7% year-on-year in August, higher than market expectations, while the month-on-month growth rate also hit a 14-month high. This data confirms the "resurgence" of inflation, and the Fed's available policy tools seem increasingly limited.
Higher oil prices were the main driver of inflation, especially gasoline prices rose 10.5% month-on-month in August, contributing more than half of the increase in the overall CPI. Behind the rise in international oil prices, crude oil production cuts in Saudi Arabia and Russia, as well as historically low U.S. crude inventories, are at play.
This large supply-demand gap will further push up oil prices, having a knock-on effect on commodity prices and other service prices, and exacerbating inflation risks.
The rise of the strike wave: workers fighting for better rights
Fermenting at the same time as inflation is a wave of strikes. In July, the Screen Actors Guild staged its largest strike in 60 years, followed in August by tensions between UPS and the truckers' union. Most striking, however, is the spread of strikes to the auto manufacturing industry.
On September 14, 150,000 auto workers had contracts with GM, Ford and Chrysler.
As wage negotiations failed to produce the expected results, the United Auto Workers launched the first large-scale strike in history. The strike first broke out in some factories, but if negotiations stalled, the strike would expand further.
The United Auto Workers has demanded higher wages and benefits for workers, down from 46 percent to 36 percent, reduced working hours to 32 hours a week, abolished pay tiers and better health insurance. They argue that the compensation of car executives has increased by 40% in the past few years, while workers' wages have increased by only 6%.
The strike has a huge impact, involving nearly 150,000 workers, and could trigger an earthquake in the U.S. auto industry, costing economic losses as much as $500 million a day.
The instability of the U.S. economy: the Fed's dilemma
The repeated inflation data and the rise of the strike wave have left the Fed in an unprecedented predicament. On the one hand, if strikes in the auto industry continue, it could disrupt supply chains and push up car prices. At the same time, if the wage increase is successful, it will lead to a continuous rise in labor costs, which will become a huge obstacle for the Fed to achieve its 2% inflation target. These factors all support the Fed to continue raising interest rates.
However, on the other hand, strikes will inevitably have a negative impact on the economy. Will continued rate hikes lead to an unnecessary recession or trigger a new round of financial turmoil? For now, Fed officials seem to have agreed to leave rates unchanged at the September meeting to allow more time to observe the impact of rate hikes on the economy.
However, industry insiders said that the Fed may restart interest rate hikes in November, putting the US economy under stagflationary pressure. At this point, the Fed will face a difficult choice because inflation may have become entrenched. Jeffrey Roach, chief economist at LPLFinancial, noted that the Fed is likely to take a more "hawkish" stance at its next meeting after seeing the data performance.