Fed inflation goals remain on track


Continued monthly inflation of two ticks a month would keep the US on track to meet the Federal Reserve’s inflation goals. Interest rate normalisation will proceed accordingly.
Group Research11 Aug 2017
Photo credit: AFP Photo


US job vacancies rose to 6.2m in June and growth continues to outpace actual hiring, which, as most are aware, remains impressive indeed even after eight years of recovery. Over the past 12 months, employers have added 2.2m people to their nonfarm payrolls. In spite of that, vacancies have grown by 630k. When demand exceeds supply, prices eventually go up. Unemployment has fallen to 4.3% of the labour force and, with vacancies having risen to 3.8% of the same, whatever slack remains in labour markets seems likely to dwindle even more rapidly than it already has.

Markets expect headline and core consumer price index (CPI) prices each rose by two ticks in July. If so, that would lift headline CPI inflation to 1.8% year-on-year from 1.6% in June and lift core inflation to 1.8% from 1.7%. Continued monthly inflation of two ticks a month seems like a reasonable presumption for the next few months, so long as oil prices remain stable and wages don’t take off as they’re bound to do eventually. Those two ticks per month would lift core CPI inflation to 2.0% y-o-y by October. The same path would lift core personal consumption expenditures inflation – the US Federal Reserve’s favoured gauge – to 2.0% y-o-y by December. In short, Fed inflation goals remain on track. Interest rate normalisation will proceed accordingly.