Monetary Policy & Inflation | US
Despite many headline-grabbing downward revisions to US growth, most economists are not expecting inflation to fall by much. The consensus for core PCE is for a decline from 1.8% YoY in Q1 to 1.7% in Q2 and Q3 and back to 1.8% from Q4 onwards. These have been revised down from earlier, but the trend is still up (Chart 1). Even the most bearish banks on growth have core inflation only going down to 1.4%, which is the range of the last few years.
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Despite many headline-grabbing downward revisions to US growth, most economists are not expecting inflation to fall by much. The consensus for core PCE is for a decline from 1.8% YoY in Q1 to 1.7% in Q2 and Q3 and back to 1.8% from Q4 onwards. These have been revised down from earlier, but the trend is still up (Chart 1). Even the most bearish banks on growth have core inflation only going down to 1.4%, which is the range of the last few years.
Yet, when we look at the most recent price components of US business surveys, they suggest a collapse in core inflation (Chart 2). This would come on top of a likely collapse in headline inflation due to falling oil prices. Around the 2008 global financial crisis, we saw a similar drop in the surveys, and back then core inflation fell to 1%.
One reason for economists holding back from revising inflation lower is the scale of monetary and fiscal stimulus. In a rehash of arguments seen in 2008, the expected printing of money could generate inflation. Meanwhile another commonly cited reason is that the breakdown in supply chains and the general supply shock dynamics of the COVID crisis could lead to higher prices much like the 1970s.
Both have some validity and could impact prices in the medium term, but the shorter-term dynamics of weaker demand are likely to dominate and pull prices lower. Indeed, one of the largest components of core inflation is housing, and both rents and house prices are unlikely to rise in the near term. Other sizeable components are health and education – both are likely to be constrained either through government intervention or rising unemployment.
Therefore, while there is a compelling case for inflation in the medium term, we are first likely to face a significant bout of falling inflation – that is, disinflation.
Chart 1: US Core PCE Consensus Forecasts:
Downwards Revisions, But Trend Still Up
Source: Bloomberg, Macro Hive
Chart 2: US Surveys Indicate Big Drop in Price Coming
Source: Fed, Macro Hive
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)