In the second instalment of the analysis of the US economy, we look at the effects of inflation and the Federal Reserve’s monetary policy. The decrease in oil prices and the strength of the dollar have attributed to the reduction in import prices – this has kept inflation under wraps this year.
Inflation remains subdued, this can be partly explained by the decrease in energy costs. However, this may not last long. Oil prices are expected to rise this year, as OPEC curtail supplies.
Core inflation, which excludes fuel and food, is the measure closely watched by Fed members, to correctly analyse domestic price changes. Some argue that given the labour market’s strength inflation should be higher and that’s because of the depressed inflationary data, the Fed should not rush interest rates – as the US economy is not growing fast enough.
The US Federal Reserve aim for 2% annual inflation.
However, Donald Trump’s protectionist proposals as well as a stronger dollar could push inflation to new highs in 2017. The rise in inflation would be met with a faster acceleration of interest rates from the Federal Reserve.
While exports soar higher, imports may take a hit. Boarder taxes could hinder cheap imports. The lack of competition from imports could send US-made goods and services higher, pushing inflation upwards.
The Federal Reserve have said that they will cut inflation off with higher interest rates if it grows beyond the 2% mark, even if that inflation encourages nominal GBP of 3-4%
Inflation could be derived from the employment sector; the unemployment rate has halved since its highest point. As the US move towards full employment, inflation could steer inflation higher.
However, US wage growth is still lagging at 2.25% increase in January from the month of December. This dally in wage stimulation could dampen inflation.
The US economy advanced 1.9% in quarter 4 of 2016. This was below forecasts of 2.2%. The slump was afforded to a decrease in exports and decrease in consumer spending (which we will expand on tomorrow)