So We Finally Have Some US Inflation. Or Do We?

It’s not easy to grasp the rhythm coming from the US right now. Like any good hip hop mix, the rap is upbeat but the rhyme has a complexity to it. Inflationary tendencies are setting a hot beat, but there is a murky undercurrent coming from deep negative US real rates. The official sector is all in; it may need to hang in there a bit longer before the job is fully done.

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The Federal Reserve has seen it all before, and is at it again – generating demand to help stoke inflation

The last time US inflation exceeded 4% was around the time of the great financial crisis. Since then, a low rate and tame inflation environment has dominated. In fact, US growth or inflation has never really motored since then. It has been more impressive than seen in Europe, but not as energetic as would be typical from the US economy.

It took quite some years before the Federal Reserve felt comfortable enough to tempt its funds rate higher, which it finally did, culminating in a peak at 2.5% in 2019. The Fed had its critics, as it came against a backdrop where headline inflation had averaged an unimpressive 1.7% since 2008. In fact, the US economy was bracing itself for a recession by mid-2019, long before we ever heard of COVID, which ultimately pushed us into one, a big one.

The policy response to COVID was remarkable on a number of fronts. First, the Fed had a bag of tricks that it had employed during the great financial crisis that it could unleash in a super quick fashion. And the Fed added to these, through various bespoke pandemic relief measures. The Fed also chopped rates to zero in a flash and engaged in a very aggressive bond buying program, hoovering up bonds and adding liquidity at a speed that was supersonic compared with the great financial crisis response, which was reasonably swift in itself. 

Fast forward to today, and the 4.2% headline inflation reading is an outcome of this response. But it's not just the Fed that has driven this.

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Disclaimer: This publication has been prepared by the Economic and Financial Analysis Division of ING Bank N.V. (“ING”) solely for information purposes without regard to any ...

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