US: So much growth, so little inflation... - ING

"Inflation is on the cusp of a turn, likely prompting a swift response from the Federal Reserve and adding to upward pressure on Treasury yields," ING economists argue.

Key quotes

The US economy is in its ninth year of expansion yet consumer prices have risen just 14% in total during this period. Even now headline consumer price inflation is running at slightly above 2% YoY while stripping out food and energy the core rate of inflation is only 1.7% YoY.,

The personal consumer expenditure deflator series suggest price pressures are even more benign. Consequently, the traditional belief that diminishing spare capacity should generate price and wage pressures has started to be questioned. So what is going on, will things change and what does it mean for the Federal Reserve?

After emerging from such a deep and painful recession there was a huge amount of slack in the US economy. Unemployment had peaked at 10%, industry capacity utilisation was running at just 66%, the weak global economy led to ongoing weakness in commodity prices and wariness about the sustainability of the recovery led businesses to price cautiously. As such it wasn’t a surprise that inflation pressures were slow to materialise.

However, as the recovery continued it became trickier to point to specific reasons for why price pressures were so muted. The Fed suggested sub-target inflation between 2014 and 2016 could be explained by the fact that there was still slack in the labour market, commodity prices had softened and the dollar had appreciated, helping to depress import price inflation.

But there are also clear structural reasons. For instance, digitisation and the price transparency it has brought has been a major factor. Consumers are able to quickly and easily check prices on-line, which has intensified competition and depress goods price inflation. Broader use of technology such as online platforms like AirBnB and Uber have disrupted industries, brought greater competition and also lowered prices.