26 Jan 2015
US inflation may drop below 0.5% in coming months – Rabobank
FXStreet (Barcelona) - The Rabobank Team anticipate that US may find it difficult to escape the global deflation theme, expecting US inflation to fall below 0.5% unless oil prices rebound quickly.
Key Quotes
“The US economy cannot escape from global disinflation. Inflation (CPI) fell to 0.8% year-on year in December, from 1.3% in November. Unless we see a rapid rebound in oil prices, our econometric model predicts a further drop in inflation below 0.5% in the coming months.”
“However, there are several ways in which disinflation may be longer lasting. For example, if gasoline prices remain low, they could drag down inflation expectations. Consumers may not make the distinction between core inflation and (food and) energy prices as the Fed does. If inflation expectations fall this will also lead to a decline in core inflation.”
“Moreover, the fall in oil prices is not simply a supply side phenomenon. The slowdown in world aggregate demand for goods and services, including those made in the US, may have a more sustained disinflationary impact. This effect is amplified by the appreciation of the US dollar, which is partly caused by the Fed’s termination of QE3 and expected hiking cycle.”
“[..] the inflation data released since the previous FOMC meeting suggest that disinflation is more rapid and severe than anticipated by the Committee at the previous meeting.”
“While the Fed can tick the boxes for employment growth and unemployment on its checklist for the first rate hike, underemployment remains elevated despite its decline. What’s more, wage growth is decelerating and inflation is moving away from its 2.0% target.”
“The combination of stronger-than-projected disinflation, wage deceleration and plunging market inflation expectations is testing the confidence of various FOMC participants.”
“All’n all, it may be difficult to tick all the boxes by the summer. Consequently, we remain doubtful of a mid-2015 rate hike and stick to our 2015Q4 call.”
Key Quotes
“The US economy cannot escape from global disinflation. Inflation (CPI) fell to 0.8% year-on year in December, from 1.3% in November. Unless we see a rapid rebound in oil prices, our econometric model predicts a further drop in inflation below 0.5% in the coming months.”
“However, there are several ways in which disinflation may be longer lasting. For example, if gasoline prices remain low, they could drag down inflation expectations. Consumers may not make the distinction between core inflation and (food and) energy prices as the Fed does. If inflation expectations fall this will also lead to a decline in core inflation.”
“Moreover, the fall in oil prices is not simply a supply side phenomenon. The slowdown in world aggregate demand for goods and services, including those made in the US, may have a more sustained disinflationary impact. This effect is amplified by the appreciation of the US dollar, which is partly caused by the Fed’s termination of QE3 and expected hiking cycle.”
“[..] the inflation data released since the previous FOMC meeting suggest that disinflation is more rapid and severe than anticipated by the Committee at the previous meeting.”
“While the Fed can tick the boxes for employment growth and unemployment on its checklist for the first rate hike, underemployment remains elevated despite its decline. What’s more, wage growth is decelerating and inflation is moving away from its 2.0% target.”
“The combination of stronger-than-projected disinflation, wage deceleration and plunging market inflation expectations is testing the confidence of various FOMC participants.”
“All’n all, it may be difficult to tick all the boxes by the summer. Consequently, we remain doubtful of a mid-2015 rate hike and stick to our 2015Q4 call.”