The last time inflation was above the current level in the USA was the 1982 World Cup being played. Of course, the highest inflation in a generation is unsettling, so the expectation that a series of rate hikes will start at the Fed meeting on March 16 is heavily weighted on the Fed funds futures side. The Fed, which shifted the focus of the labor market to the priority of prices in order to combat inflation, doubled the monthly discount in the 120 billion-dollar bond program in December to $30 billion, as the first step of tightening. This means that the purchases end after two months.
Speaking before the Senate Banking Committee on Tuesday, Powell said rate hikes could be expected as long as current inflation conditions prevail. After seeing economic growth curtailed in 2021 and inflation rising due to supply shortages and delays, the Omicron variant poses a new threat to supply lines as we enter 2022. It remains unclear whether Omicron has hit supply chains as hard as previous waves of COVID-19. However, the number of firms experiencing supply shortages has decreased in the latest output indicators. Therefore, the series can now pass to the stage of taking a step towards stationarity. Sales prices are increasing, but at a slower pace compared to previous months. Levels in cost inflation still remain high due to the effects of supply shortages. Restriction of production due to shortage of raw materials and short supply of semiconductors are the main problems, their resolution will ease the production and output outlook.
In retail sales, which will be announced tomorrow, we may see some slowdown due to front-loading consumer behavior. While a decrease of 0.1% is expected on a headline basis in December data, there is an expectation of an increase of 0.2% in items that exclude fuel and automobiles. Demand is fading a little, but the developments in gasoline and energy prices in December seem to have lowered the headline expectations in terms of amount. The image of the CPI is not at a scale that will change the Fed's plans, but at the next stage, it will be necessary to look at how to advance the level of normalization in monetary policy. In other words, shrinking the balance sheet... We will look at the balance sheet strategy, relying on the strong position of the economy and faster tightening to reduce inflation.
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