Is US inflation approaching its peak?

With U.S. inflation hitting a new high of 9.1% in June, more aggressive U.S. interest rate hikes are raising concerns, while falling commodity prices have raised concerns. hope for a spike in inflation in the United States.

A slowdown could eventually occur due to a decline in consumer and business confidence, recession concerns and the impact of higher rates.

Although there has been some moderation recently, there is still considerable uncertainty about supply-side inflation caused by supply disruptions, as well as the potential lagged effect of the pass-through of costs by companies.

At the same time, central banks are also tightening aggressively to dampen demand and reduce the pass-through of strong supply pressures.

In Malaysia, subsidies help limit the passing on of high external costs to domestic consumers.

But as the local economy continues to recover and businesses continue to face high cost pressures, we could see higher cost pass-through, said Edward Lee, chief economist at Standard Chartered Asean and of South Asia.

With its current account surplus, Malaysia is much better protected against rising US rates; however, it could also mean slower export growth as US demand slows.

US rates are likely to rise further, but a spike in US inflation may not be too far off, given the recent decline in commodity prices; this will allow the US Federal Reserve (Fed) to ease its rate hikes, said Frederic Neumann, chief Asia economist at HSBC and co-head of global research for Asia.

While recession fears dominate, it is important to note that inflation risks are far from over, the Fed and other global central banks remain determined to continue their aggressive rate hikes in the months ahead.

The US Dollar is likely to strengthen further in the current cycle of Fed rate hikes as its strength is bolstered by elevated volatility and growing need for safe havens.

This implies further weakness across the entire Asian FX bloc and, given China’s ongoing slowdown, further weakness in the yuan will also weigh on the ringgit.

For Malaysia, growth prospects for the second half of 2022 are still positive, driven by reopening engines, strong exports and robust foreign direct investment.

At the same time, signs of caution are emerging as multiple headwinds could dampen demand and growth, said Julia Goh, senior economist at United Overseas Bank (M) Bhd.

The reopening had revived growth in the first half of 2022, but three major shocks – the inflationary shock, the interest rate shock and the potential recession-related shock – will undermine Asean’s economic recovery in 2022-2023.

Asean faces potential recessionary shocks from Europe due to the Russia-Ukraine war, a hard landing from China due to its zero-Covid-19 strategy, and if the Fed is too zealous to fight inflation, a US recession in 2023-24.

Maybank Investment Bank’s recession model, based on the US 3-month and 10-year yield spread, estimates the likelihood of a 5% recession in Malaysia over the next 12 months.

The New York Fed model only predicts a 4% probability of recession, but the odds will increase as the Fed raises rates; a federal funds rate above 3.5% will likely tip U.S. and trade-dependent Asean economies into recession, Maybank Investment Bank said in a report.

The Fed raised its key rate an additional 0.75% for the second consecutive meeting of the Federal Open Market Committee in July, bringing the target range between 2.25% and 2.50%.

Fueling fears of a recession, US gross domestic product fell at an annualized rate of 0.9% in the second quarter of 2022, after falling 0.6% in the first quarter.

Consumer spending in the United States rose 1% on an annualized basis, significantly lower than in previous months, as consumers spent less on goods and services.

US home construction fell 14% year-on-year, weighed down by rising rates, while business construction fell 11.7% year-on-year.

Fuel prices are falling globally, but food inflation remains high due to supply disruptions and continues to put pressure on the currencies of many emerging economies that are both food and fuel importers .

With benchmark interest rates likely to rise further, the risk of default in some emerging economies remains high.

In Malaysia, as rates continue to normalize, the ringgit could strengthen in Q4 2022; Malaysia has a lower inflation rate than its peers in the region, said Chris Eng, chief strategy officer of Etiqa Insurance & Takaful Bhd.

As markets expect US inflation to peak soon, countries that are less aggressive in raising rates will see their currencies decline, encouraging exports and trade.

Once U.S. inflation peaks, funds will likely rush to emerging markets for a potential rebound in currency values ​​and better growth rates, Areca Capital Sdn Bhd CEO Danny Wong said.

Markets have started pricing in potentially weak growth in the US, or even a recession, as consumer spending slows due to high inflation.

It may be too early to expect the Fed to ease its aggressive rate hikes, as currently US inflation shows no signs of slowing down and prices have yet to fall.

There may be tougher times ahead before things settle down; hopefully it won’t slow down to the point of causing a severe recession where many people will lose their jobs and livelihoods.

Yap Leng Kuen is a former editor of StarBiz. The opinions expressed here are those of the author.

Carol N. Valencia