A whiff of stagflation

Supply shortages will ease only gradually over the next couple of years, putting sustained upward pressure on core inflation and constraining real activity. We expect core inflation to remain above 3% for the remainder of this year, with only a modest drop back next year. We anticipate that real GDP growth will be a below-consensus 6.0% in 2021 and 3.5% in 2022. (Pages 3 & 4.)
Paul Ashworth Chief North America Economist
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US Economics Weekly

Fed becoming more hawkish by the day

The continued surge in Omicron infections suggests that the disappointing December activity data will be followed by further weakness in January, but there are no signs that it will delay the Fed’s accelerating plans to tighten policy.

14 January 2022

US Data Response

Industrial Production (Dec.)

The 0.3% m/m decline in manufacturing output is probably a sign that Omicron-related employee absenteeism was already weighing on output by the end of last year. We expect an even bigger hit in January but, assuming that the surge in infections peaks soon, any losses in output should be fully reversed in February and March.

14 January 2022

US Data Response

Retail Sales (Dec.)

The 1.9% plunge in retail sales in December in part reflects what appears to be a problem with seasonal adjustment process around the holidays. The initial Omicron wave appears to have had only a modest impact. Nevertheless, it means fourth-quarter real consumption growth was a more muted 3.5% annualised, rather than the near-5% we were expecting.

14 January 2022

More from Paul Ashworth

US Economics Weekly

Economic growth outlook not quite as rosy now

The drop back in Treasury yields has accelerated over the past few weeks, as persistent supply shortages and the spread of new coronavirus variants have raised doubts about the pace of real economic growth in the second half of this year and beyond. We share those concerns and, in our upcoming US Economic Outlook that will be released early next week, we intend to revise down our forecast for GDP growth this year to a below-consensus 6.0%. Nevertheless, we still expect long-term Treasury yields to rebound a little in the second half of this year. (See here.)

9 July 2021

US Economics Weekly

Fed officials split; Biden backs infrastructure deal

Fed Chair Jerome Powell stuck to the script in his congressional appearance earlier this week, arguing it was “very, very, unlikely” that the US would experience a return to the high inflation of the 1970s. Elsewhere, President Joe Biden gave his support to a bipartisan infrastructure deal worth $1trn then promptly threatened to veto it too.

25 June 2021

US Chart Book

‘Transitory’ inflation claims look less convincing

The further jump in CPI inflation in May was again driven by a handful of categories most affected by the lifting of pandemic restrictions. But there were also clear signs that inflationary pressures are becoming more widespread, with rent of shelter inflation in the early stages of a cyclical rebound and the jump in food away from home prices a sign that severe labour shortages, and the resulting upward pressure on wages, are starting to feed through. Those trends are much less likely to be transitory, particularly when inflation expectations have continued to trend higher. With the economy still a long way from the Fed’s full employment goal we doubt that officials will be in any rush to bring forward plans for tightening policy. But we suspect the Fed will eventually be forced to admit that higher core inflation will prove more persistent they initially believed.

16 June 2021
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