Coming surge in core inflation to be sustained

Fed Chair Jerome Powell is resolute in his belief that the burst of stronger inflation we are about to see will prove temporary, with underlying inflation dropping back to the 2% target next year. We are not convinced. Given the breadth of the upward pressure on not just prices but wages too, we believe this will develop into a sustained wage-price spiral. We expect core inflation to consistently exceed the Fed’s target over the next few years although, with the Fed more focused on achieving its inclusive full employment goal, we still don’t expect the Fed to begin hiking interest rates until 2023.
Paul Ashworth Chief North America Economist
Continue reading

More from US

US Economics Weekly

Lasting price pressures building

The continued surge in prices last month was again mostly concentrated in sectors reopening or facing intense supply constraints, which allows the Fed to stick with its “largely transitory” story for now. But with signs of cyclical price pressures building and the extremely strong job openings and quits figures pointing to stronger wage pressures, we believe the Fed will eventually have to acknowledge that inflation will remain elevated for much longer.

11 June 2021

US Data Response

Consumer Prices (May)

The further jump in core CPI inflation to a 28-year high of 3.8% in May, from 3.0%, was again driven by the same handful of categories most directly affect by the lifting of virus restrictions. But there were also signs of emerging inflationary pressures in other sectors, including housing costs and restaurant prices, which suggests that not all the current upward pressure on inflation will prove transitory.

10 June 2021

US Fed Watch

Talking about talking about tapering

Fed officials may finally begin ‘talking about talking about’ tapering their asset purchases at next week’s FOMC meeting. But with recent data leaving the economy still some way from making “substantial further progress” towards the Fed’s full employment goal, we suspect that taper won’t begin until early next year.

9 June 2021

More from Paul Ashworth

US Economics Weekly

Surging prices begin to weigh on confidence

Negotiations over a bipartisan compromise on infrastructure spending continued this week, but the Republicans and Democrats are still so far apart in their offers that it is only a matter of time before these talks collapse. The Democrats next best option is to try passing a combined infrastructure and social welfare spending bill via reconciliation when the next fiscal year begins this October. Even if the centrist Democratic Senators are willing to support such a bill, which remains unclear, the spending would be largely paid for via higher taxes on corporates, capital gains and high-income earners. As the impact would be close to revenue neutral, we won’t be rushing to revise our real GDP growth or inflation forecasts.

28 May 2021

US Data Response

Durable Goods (Apr.)

The 1.3% m/m decline in durable goods orders in April partly reflected the impact of semiconductor shortages in the automobile sector, with motor vehicle orders falling by 6.2% m/m last month. Nevertheless, the continued strong growth in core capital goods orders suggests that business equipment investment will register another double-digit annualised gain in the second quarter.

27 May 2021

US Economics Weekly

A whiff of stagflation

The extent of the surge in CPI inflation in April specifically caught us a little off guard, although we had been expecting a pick-up in response to the reopening and the shortages of raw materials, intermediate inputs, and labour too. Headline CPI inflation will now peak at close to 5% in the coming months and average 3.8% this year.

14 May 2021
↑ Back to top