Inflation is rising in the US

From Westpac’s Elliot Clarke:

Although it took the election of Trump to the presidency and his subsequent promise to ‘rebuild America’ to shift the market’s attention toward inflation, core and headline inflation have actually been in a solid uptrend over the past year.

From its low of 0.2%yr in September 2015, headline PCE inflation has risen to 1.4%yr at October 2016. Unaffected by energy prices, core inflation started this period at 1.4%yr and has since firmed to 1.7%yr. Notably, on a 3-month annualised basis, headline and core PCE inflation have converged of late, respectively 1.8% and 1.7%.

Inflation is therefore nearing the FOMC’s medium-term target and, together with a labour market effectively at full employment, is giving strong support to the removal of policy accommodation. (Note, while not the focus of the FOMC, CPI inflation is actually stronger again, with core CPI inflation above the FOMC’s 2% target on both an annual and annualised basis.)


Partly due to strength in the US dollar as well as the soft state of global end-demand and cost efficiencies from globalisation, durables have been a persistent deflationary influence on the US. Of late, 6-month annualised durables deflation has been running steadily near –3.5%, a pace at the lower end of the range of the past 15 years. However, offsetting durables’ impact has been strengthening non-durables goods and robust services inflation.

Starting with non-durables, energy prices have remained the key influence through 2016. From a recent low of –42% in February 2016, 6-month annualised PCE energy inflation has risen to +26% at October 2016. Needless to say, despite its small weight in the consumption basket (circa 2.4%), this abrupt shift in gasoline and other energy prices has been a primary contributor to the turnaround in headline inflation in 2016. Its contribution to 6-month annualised headline inflation has risen from –1.0ppts in February 2016 to +0.6ppts currently. Food has acted as a partial offset to energy inflation; while clothing has had little net impact.


If we then turn to services, we clearly see the material impact reduced slack in the labour market is having on inflation. Since the beginning of 2015, services inflation has been trending up from 1.7% to 2.5% on a 6-month annualised basis. As we have often cited, a key contributor to this acceleration in services inflation has been housing and utilities, where price growth has risen from 2.4% to 4.0% at October as strong growth in rents (circa 3.5% annualised) persists and the previously deflationary impact of commodity prices on utilities has reversed.


In addition to the strong inflationary bid from housing, more recently we have also seen stronger price growth for health care and food services and accommodation. Both sectors have likely been materially affected by higher minimum wage requirements instituted in many states over the past 18 to 24 months, and it seems many businesses have responded by raising prices for end users of their services. Health care inflation has also been aided by affordable health care, which has seen a greater proportion of the population insured. However, these price gains have come at the expense of consumers who increasingly face higher premiums.

As a final point, it is worth mentioning that household expectations are yet to respond to accelerating PCE and CPI inflation. Historically these term expectations have been well anchored, limiting demandside pressures for wages/inflation. If this remains the case, then inflation should stay near the FOMC’s medium-term target and continue to allow the Committee to slowly normalise the Fed Funds Rate as befits the state of the real economy.

Houses and Holes
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  1. Inflation?

    What’s that?

    Come now, that has been cured.

    Everyone knows that provided you privatize the vast majority of public money creation (as ADI credit creation) and direct the created loot towards the inflation of asset prices and lining the deposit accounts of the now wealthy asset holders ‘going to cash’ who then hug their wealth closely and spend relatively little on the stuff the ABS measures, you can abolish inflation for all time.

    It’s a marvelous scam and has worked a treat for 25 years.

    If inflation is rising that means just one thing!!

    Government needs to screw down harder on the little people as it is those leaners who must be getting greedy and bidding up the price of the basket of necessities. Get the money out of their wallets quick smart Mr Morrison.

    Raise incomes and consumption taxes

    Cut government expenditure.

    If people were meant to have bread we would not have invented cake!

    There problem fixed and inflation can go back to hanging out with the Tassie Tiger.

  2. “Inflation is rising in the US”
    That’s stupid! There can’t be inflation. It’s impossible./sarc

  3. Boom goes the bond stick! Next stop, offshore borrowing rates followed by mortgage rates, and then hopefully an end to this madness.

  4. The US mortgage slave is well positioned to absorb rises in inflation and hence rates. They have 30 yr fixes there, and their levels of debt are pretty low. 450k is considered a big mortgage.

    The marginal Aussie mortgage slave on the other hand…

    • Their (USA) problem would become if the USD lost its perch as the world reserve currency. You can yake bets of that however you like. My sole point being that USA economic welfare depends very much on its being able to just print up money to pay its bills with the rest of the world.