While the new hot topic is inflation fears (an argument against an overly "ambitious" or too large relief package by Democrats), the US was waiting with an even more insistent look for yesterday’s last Jerome Powell speech. And in the end, no more indication about inflation. Rather, the Fed President insisted on the need to achieve and maintain a maximum number of jobs, which will require "more than a supportive monetary policy".
Indeed, the US labour market is still far from a full recovery, with unemployment in January at 6.3%, slightly less than twice the pre-crisis level (3.5%). This clearly echoes Mr. Biden's $1.9 trillion Covid recovery plan. Employment remains a priority.
For more indications on inflation, we had to look at the CPI indices released yesterday, which overall showed only a modest rise in January's US consumer prices. CPI index was at 1.4% year-on-year (0.3% MoM), slightly above December’s 1.3% growth (revised downward). Especially, when looking at core CPI (excluding food and energy) prices grew only 1.4% YoY (flat in January, MoM), below December's level (1.6%). As a reminder, last year's January data was 2.3%.
This supports the view that inflation still remains at benign levels, although we can expect by far higher levels in the coming months. In the very short term, between now and spring, base effects (remember that in March we will have a basis for comparing with oil at 0!) will give us inflation figures that will fuel all the short-term excitement about inflation.
But we are here only talking about one month figures... Which don't say everything about the medium to long term. And when the service sector will truly be able to reopen, what about the prices of services? Will companies take advantage of their pricing power to raise prices even more and "make up for lost time"? There may therefore be a base effect here too. We can therefore expect a 12-month phase where inflation will be too high, more due to a "one off" shock than something really fundamental, which suggests little implications.
A clear distinction must therefore be made between short term noise / temporary base effects versus long term trend. And on this long trend, we remain fairly confident. In such long-term perspective, what is important to monitor is unemployment, the output gap (i.e. the difference between the actual and potential production of the economy; in this logic, when the output gap increases, unemployment decreases, upward pressure on production costs is triggered and prices of goods and services accelerate), etc.
The question of an excessively accommodative monetary and budgetary policy mix therefore seems largely premature at this stage with regard to inflation…
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