Did US inflation peak in March?

Overnight, the U.S. Department of Labor released the CPI and core CPI statistics for March. The CPI, which rose 8.5% year-on-year, slightly exceeded market expectations and hit a new high since 1981. The so-called core CPI, which excludes food and energy prices, rose 6.5% year-on-year, which also hit a new high, but - please note this "but" - was lower than expected, and only slightly higher than last month's 6.4%.

President Biden said that Putin should be blamed. Although inflation in the United States has been soaring since last year, the fight between oil-producing countries and grain-producing countries has put great pressure on easing inflation. Although Biden said in December last year that everyone should not be afraid of inflation and that the growth rate will soon peak, it has been several months and the growth rate has not decreased but increased, which is really embarrassing. (See Liu Jiaolian's article on February 11, 2022, "US CPI hits a new high, the market fluctuates back and forth, and both long and short positions explode")

Biden then used a combination of punches:

First, blame Putin. Putin is blamed for the failure to ease the CPI.

Second, let's interpret the core CPI. The growth rate of the core CPI is indeed slowing down. Although it is still increasing, the rate of increase has become lower.

Third, give Chinese products exported to the US a tax refund and extend the exemption. (See Liu Jiaolian’s article on March 25, 2022, “What does the US intend to do by restoring the exemption of import tariffs from China and what will happen in the future?”)

Of course, there is a fourth one, which is that the Federal Reserve will cooperate with taper (from November last year to February this year), interest rate hikes (which have already started in March this year) and possible subsequent balance sheet reduction to tighten the currency, prompting the US dollar to strengthen and capital to flow back.

After all these measures, can the US price inflation be brought under control? Has the CPI peaked in March? Or at least, has the growth rate peaked?

Among these boxing techniques, the first two can only be regarded as placebos. As the famous saying goes, "occasionally cure, often help, always comfort".

The third move is practical and effective. It would be best to directly cancel the trade war with China. However, this is not in line with the current mainstream political correctness in the United States and therefore cannot be thoroughly implemented. It can only be done secretly and covertly. After doing it, they cannot admit that they are weak and they have to fight for the sake of face to be strong and win.

The fourth move is actually the most useless. As we all know, CPI statistics have long excluded asset prices and capital goods prices. Tightening monetary policy, raising interest rates, and shrinking the balance sheet directly impact asset prices and the capital market. Do they have any direct effect on controlling inflation? No. Just like loosening monetary policy will not cause a surge in CPI.

There are 100 million bowls of rice, just enough for 100 million mouths. Each bowl of rice costs $1. If the money in the pockets of these 100 million people suddenly changes from $1 to $5, will they be willing to pay $5 to buy this bowl of rice? No. They will still pay $1 to eat rice, and then use the extra $4 to buy stocks and Bitcoin.

No one will voluntarily raise the price just because they have more money. Everyone wants to buy what they want at the lowest price possible.

Unless the merchant selling white rice has monopolized the market for some special reason, squeezed out competitors, and gained pricing power, the merchant will try to raise the price of rice to the highest possible $5 to maximize its own profits.

At this time, if an "import" tax is imposed on rice, for example, a tax of $1 is imposed on each bowl of rice, then the result is that the merchant and the tax department share the $5 income, with the merchant getting $4 and the tax department getting $1.

The price of rice has increased, the consumer price index has risen, and more money has been spent on buying rice, so there is less extra money available to buy assets in the capital market, and the capital market has begun to fall.

In this case, can raising interest rates bring down rice prices? It can only put further pressure on the already falling capital market.

Bitcoin continued its decline overnight, falling below $40,000 again and attempting to build a defense near this level.