USA: Moderate inflation – despite robust economy

An overall moderate outlook for inflation had given the US Federal Reserve the leeway to end its monetary policy normalization course at the turn of the year. This is mainly due to the subdued rise in wages, which has been recorded despite historically low unemployment. Fed Chairman Jerome Powell has also recently pointed out that the link between a good employment situation and wage growth rates has eased. The resulting boost in consumer prices is therefore also lower than in previous economic recovery phases.

Nevertheless, inflation rates should pick up somewhat in the coming months. We expect inflation to average 2.0 percent in 2019 and 2.4 percent in 2020. The outlook for the coming year reflects not only a slight rise in wage demands but also a bearish effect and the existing penalties on imports from China on consumer prices. The oil price, on the other hand, will probably have a dampening effect on inflation.

We believe that tariffs on China will remain in place for the time being, even if it was agreed at the G20 summit at the end of June to resume consultations. However, there has been no serious indication of any rapprochement so far. As a result, inflation expectations among private households, and thus wage demands, are also likely to rise slightly. Some companies have already announced that they will pass on the increased costs as the conflict progresses. However, this should in fact limit the strong competitive pressure in the retail sector. The bottom line is that we expect the premium for the inflation rate due to the conflict with China to be around 0.2 percentage points.

In view of this moderate outlook for inflation, the US Federal Reserve does have the leeway to take a „safety step“ at the end of the month in the form of a rate cut. In addition, economic momentum and employment growth have slowed, so that the risk of the economy overheating is currently rather low. On the other hand, it is not only the June data on retail trade and industry that speak against an economic slump. Even with the quite high level of stimulus indicators, the Fed would hardly have been active in the past.

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