There is a mantra amongst economists when asked to give their opinion. It is okay to give a number or a timescale, but never together. 

So, the US CPI (consumer price index) report came out and it was a shock. The rate was 8.5%, much higher than expected.

This resulted in markets immediately repricing the likely interest rate levels higher as fears increased that inflation was imbedding with the only solution being higher interest rates to destroy demand.

So, let’s look at the reality of the numbers from Thursday and see exactly why CPI is 8.5%.

The numbers

The war

Firstly, and most importantly is the effect of the increased oil price post Russia’s invasion of Ukraine.

This is an extraneous event so can be seen as not structural. It has created 2.8% of the inflation directly.

It has also added indirectly to the rise in other costs due to transport costs, farming etc.

So, the commodity disruption of the war is around 3.5%.  


If the reopening distortions still being felt by business are quantified, they account through stressed supply chains and increased costs for travel and leisure for a further 2%.

Again, these are effects that are not structural so will self-regulate and return to a normalised rate over time.


There is significant inflation in housing and rents. It is clear that there is a shortage of affordable housing, and the reasons are known but why the pandemic has caused such a spike in shelter costs is unclear.


The takeaways from the above breakdown of the inflation numbers are.

  1. The majority of the 8.5% has been caused by Covid and the war. These are not structural, will self-correct and raising rates will do little to help apart from destroying demand.
  2. The actual normalised inflation rate if commodities, food, and supply chain issues are removed is around 2.8-3.2%.

This is not a scary number and why the Fed and BOE said they were confident inflation would normalise and were not concerned. They were not delusional, although it now looks like it.

All the most recent economic figures are showing rapidly decelerating economies. Consumption down, activity down, spending down, layoffs way up.  It is quite possible that in a few months we see some pretty dire economic numbers with demand having gone off a cliff. This feeds through into unemployment numbers which will rise.

There is a raging argument between those convinced we have structural inflation back with commodities and wages pushing each other higher and those that say we will return shortly to pre pandemic low growth low inflation conditions.

For what it’s worth I’m in the return camp.

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