Has the slow decline in the pace of consumer price inflation in the US hit bottom? If so, is that good news for the economy? A cautious “yes” applies in both cases, albeit with the usual caveats. Looking at the core reading of consumer price inflation through last month suggests that the price trend has a floor around the 1.6% rate. We won’t know for sue until future reports arrive, but it’s getting easier to think that we’ve seen the trough. If so, that’s an encouraging transition for the economic outlook.
Disinflation has been a burden on the US economy because it raises the threat of what Paul de Grauwe at the London School of Economics labels the debt-deflation dynamics. The risk is considerably higher in the Eurozone, of course, which is a big reason why the economic outlook is so much weaker in Europe vs. the US. In fact, that difference is set to widen further in favor of the US if inflation’s pace is set to rise on this side of the pond.
In the wake of the Great Recession, the slow decline in the annual rate of the consumer price index has been a sign of macro distress. But inflation seems to be stabilizing in the US, in part because the economic trend is holding steady. Although the harsh winter brought a bout of macro turbulence, the March data looks encouraging, inspiring forecasts that a spring revival is underway.
Among the analysts who see inflation creeping higher is Hugh Johnson of Hugh Johnson Advisors, who tells Yahoo Finance:
I think when you get to about the middle of 2015…you’re gonna start to see [the] unemployment rate… very low, somewhere around 6%; you’re gonna see inflation rates… a little bit higher and that’s when the Federal Reserve is gonna consider very seriously about raising it’s target for the federal funds rate from the 0-25 basis points to as much as the 25-50 basis point range.
Paul Dales, a senior economist at Capital Insight, also sees inflation edging higher in the months to come. “We suspect that core inflation will rise to 2 percent this year and beyond it next year, which would catch the Fed off guard,” he predicts in a research note sent to clients.
Some will see the change in the inflation trend as troubling, and it could be if it comes without a stronger rate of growth. But at this stage, higher inflation is still a sign of progress because it will probably be connected with a broader, faster expansion. By contrast, low and falling inflation has been a sign of macro weakness in recent years, but this burden finally appears to be fading, as I discussed last week. The capital markets are inspired by this change, and for good reason. An economy that can break free of disinflation/deflation is an economy that is laying the foundation for a faster pace of economic recovery.
Granted, there are many things that could wrong and derail the outlook for stable-to-moderately higher inflation. Economic growth is still weak by historical standards and so the case for seeing higher inflation is still a precarious forecast. Meantime, it remains to be seen if the Fed can engineer a higher rate of inflation without losing control of the pricing trend. But there are reasons to think that the US has finally turned a corner on this front, and for all the right reasons.
Expectations are one factor. Dismal scientists think that hiring will pick up in the months ahead, according to latest survey of economists via the National Association for Business Economics. In fact, of the 72 economists polled, there’s full agreement that the US economy will expand this year.
Forecasts can be wrong, of course, but the broad trend for US macro remains positive, based on the published numbers to date. Recession risk, in other words, is low. That’s old news, as the monthly macro updates on these pages have shown (see here and here, for instance). But if inflation is also stabilizing and perhaps rising toward the Fed’s 2% target, we’ll have one more clue for thinking that the recovery will strengthen.