CDI Economic Summary: US inflation picks up as consumers keep spending

NEW YORK (ICIS)–Inflation has not only permeated the debate on the US and global economic outlook, but also the political realm, as its becoming clear that certain price pressures will persist well into 2022.

The US Consumer Price Index (CPI) jumped 0.9% in October from September, and was up a stunning 6.2% year on year – the most in more than 30 years. Much of the month-on-month gain was in energy, including electricity (+1.8%) but also in new cars (+1.4%) and used cars (+2.5%).

Excluding food and energy, the core CPI was up 0.6% month on month and 4.6% year on year – still at elevated levels no matter how you cut it.

Economists expect year-on-year CPI to moderate to 3.0% in Q1 2022 and then to 2.3% by Q3 and Q4 next year.

Supply chain disruptions are front and center when it comes to fly-ups in prices, from used and new cars, to housing, appliances and electronics. As these disruptions ease, as they are widely expected to next year, inflation should subside – but not all of it.

Consumers keep spending
A big part of the equation is the demand side, and the US consumer shows no signs of slowing down, despite inflation concerns.

Retail sales rose 1.7% in October from September after a 0.8% month-on-month rise in August. Notable gains were in ecommerce (+4.0%), gasoline (+3.9%), electronics and appliances (+3.8%) and building materials and garden equipment (+2.8%). Arguably, some of the holiday shopping may have been pushed back earlier because of fears of supply chain bottlenecks.

However, US GDP growth forecasts continue to steadily taper off, with consensus estimates for 2021 now at +5.5% versus +5.7% last month, and the 2022 forecast easing slightly to +4.0% from +4.1%.

Light vehicle sales are showing signs of improvement, up 6.3% in October from September to 13.0m units but still down 20.8% year on year. Sales may have bottomed in September at 12.2m units with production also improving but remain well off pre-pandemic levels of 16-17m.

Auto sales improving
Auto dealer inventories hit a record low of 13.3 days of supply on 1 November versus an average of 37.7 days in the prior 12-month period. ICIS projects light vehicle sales to ramp up to over 14m units in Q4 2021, and then steadily up to more than 17m units by Q3 2022 as chip supply constraints ease.

Housing activity continues at a healthy pace with October starts down 0.7% from September to 1.52m, which was up 0.4% from a year ago. Headwinds from escalating prices and higher interest rates have yet to cause a meaningful slowdown, and ICIS projects continued strength into 2022 at over 1.6m units.

Despite all the supply chain issues, US manufacturing activity has been exceptionally strong with the October reading of the ISM Manufacturing PMI rising to 61.1 from 59.9 in September, logging its 16th consecutive month of expansion (above 50).  And the ISM Services PMI shot up to a record 66.7 in October from 61.9 in September.

Meanwhile, the Fed has finally started tapering its $120bn in monthly asset purchases to the tune of $15bn per month, with an expected end by mid-2022, signaling the beginning of the end of easy money policy. The first interest rate hike is widely expected in H2 2022.

Infrastructure bill impact
The $1tr infrastructure bill signed into law is projected to boost spending on chemicals and plastics by an additional $45.8bn over the next decade, providing a long-term tailwind for the sector.

Overall, our leading barometer of the US business cycle registered a 1.0% gain in November after a 1.1% gain in October, and is up 9.5% year on year. While growth has clearly peaked, the expansion is projected to continue at a solid pace into Q2 2022.