China News Service, June 22. As of May 2022, the year-on-year growth rates of U.S. CPI and core CPI have reached 8.5% and 6.0% respectively. Although this data is still far from the high point in the 1970s, it is already the highest since the 1980s. The highest inflation level si

Deputy Director of the Institute of Finance, Chinese Academy of Social Sciences, Deputy Director of the National Finance and Development Laboratory Zhang Ming Author's photo

[Looking at the United States] Zhang Ming: Does the current inflationary pressure in the United States come from the supply side or the demand side?

China News Service, June 22. As of May 2022, the year-on-year growth rates of U.S. CPI and core CPI have reached 8.5% and 6.0% respectively. Although this data is still far from the high point in the 1970s, it is already the highest since The highest inflation level since the early 1980s.

In order to curb this round of inflation, the Federal Reserve has raised interest rates three times so far, with a cumulative increase of 150 basis points. Since June this year, the Federal Reserve has also begun to shrink its balance sheet, shrinking its balance sheet by US$47.5 billion per month from June to August, and US$95 billion per month thereafter.

However, a core question is, does the current round of US inflation pressure come from the demand side or the supply side? If inflationary pressure mainly comes from the demand side, then there is nothing wrong with demand management through monetary policy contraction. However, if inflationary pressure mainly comes from the supply side, then tightening monetary policy to curb inflation may lead to a sharp contraction in total output and quickly plunge the U.S. economy into recession. Therefore, it is crucial to clarify the sources of inflationary pressure.

data shows that although the current year-on-year growth rate of the US CPI ( consumer price index ) is still significantly lower than that of the 1970s, the current year-on-year growth rate of the US PPI ( producer price index ) is very close to the level of the 1970s. As of May 2022, the U.S. CPI growth rate is 8.5% year-on-year, but the PPI growth rate is as high as 21.5% year-on-year. The gap between the two is as high as 13 percentage points. The gap between the year-on-year growth rate of US CPI and PPI is the largest ever for . If the PPI growth rate is significantly higher than the CPI growth rate, this means that inflationary pressure is likely to come more from the supply side .

Among the CPI sub-indexes, in May 2022, the top three with the largest increases were: transportation (19.4% year-on-year), food and beverages (9.7%) and housing (6.9%). Among the PPI sub-indexes, the top three with the largest increases in May 2022 were: fuel (55.6% year-on-year), agricultural products (25.1%) and metals (21.7%). This means that whether it is the changes in the CPI or PPI sub-indexes, this round of U.S. inflation is more cost-driven and driven more by rising international oil prices. The rise in international oil prices is highly related to the Russia-Ukraine conflict.

To sum up, since the source of this round of US inflationary pressure may come more from the supply side, the Fed's rapid contraction of monetary policy may be quite dangerous. If done improperly, the U.S. economy could quickly fall into a recession.

(Author Zhang Ming, deputy director of the Institute of Finance, Chinese Academy of Social Sciences and deputy director of the National Finance and Development Laboratory)