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Chief economist update: US inflation may not be as transitory as the Fed believes

We really do see what we want to see and hear what we want to hear ... and rationalise accordingly.

How else does one explain the US equity market's opposing reaction to the two most important indicators the Fed watches in determining its next policy move only a month apart?

Wall Street rallied last month when the US Bureau of Labor Statistics (BLS) reported that the US economy added 266,000 jobs in April, well-below market expectations for a nearly 1 million gain (978,000 to be exact), but sold off three days later when the same agency revealed that headline inflation rose by 0.8% over the month of April - the biggest increase since June 2009 and four times above market expectations for a 0.2% gain - taking the annual headline inflation rate to 4.2% (the fastest rate since September 2008) from 2.6% in the previous month.

'twas the same this month, US employment disappointed. Only 559,000 jobs were generated in May, missing consensus expectations for the creation of 650,000 to the employment heap, reinforcing views that inflation concerns are misplaced.

Three days after. Same as last month the BLS released figures showing that headline and core inflation grew by more than expected but the financial markets' reaction was different - US equities fell in May, they advanced this month around.

America's annual headline inflation rate accelerated from 4.2% in April to 5.0% in May - the fastest since August 2008. Core inflation increased by 3.8% in the year to May - the most since June 1992 - from 3.0% in the previous month.

I agree, part of the increase in inflation - headline and core - was due to base effects. It also underscores supply and production constraints as Americans bought more pre-loved vehicles. The BLS reports that, "The index for used cars and trucks continued to rise sharply, increasing 7.3 percent in May. This increase accounted for about one-third of the seasonally adjusted all items increase".

Unable to buy brand new vehicles because of production and supply constraints, the Joneses are purchasing used cars. They have the wherewithal to do so - compliments of the Federal Reserve's low interest rates and the Biden administration's generous fiscal spending.

Would inflation turned out to be transitory as the Fed assures? Or would inflation continue to accelerate even after the base effects are washed out of the stats?

Recent indications are that continued monetary and fiscal policy largesse would put a lotta money in Americans' pockets, in addition to the higher wages they'll get to get off the higher pay offered by Uncle Sam (if they're unemployed) relative to what they'll be receiving compared to flipping burgers.

Bottomline, and I'll bet my right (eye)balls on it ... preserving the monetary and fiscal status quo would keep upward pressure on US inflation.

Read more: FedAmericaAmericansBidenBottomlineFederal ReserveJonesesUncle SamUS Bureau of Labor StatisticsWall Street