Quick-take on the US inflation outlook
Jared Franz
US economist
Tim Ng
Fixed Income Portfolio Manager
Jeremy Cunningham
Investment Director

Below is a brief recap of the views of Jared Franz, a US economist at Capital Group, Tim Ng, a fixed income portfolio manager who is also a member of the interest rates team as well as Jeremy Cunningham, an Investment Director.

US inflation surprised to the upside in April with the core consumer price index rising 0.9% in April and headline CPI up 0.8%1. This materially changes the maths on inflation. Even if the monthly trend in inflation decelerates to 0.15%, slightly below the pre-pandemic trend, we estimate that the annual change in core CPI (all items less food and energy) will stay above 2.5% for at least the next year. In all likelihood, the monthly trend will probably be much firmer than 0.15% over the coming months.

This in turn implies the year-on-year rise in core personal consumption expenditures (PCE) is likely to accelerate above 2.25% and remain there for an extended period. In essence, we are at the Federal Reserve’s target for inflation. While we still have significant progress to make on the employment front, April’s inflation report raises the probability that the Fed may look to taper its asset purchases earlier than expected. Thus, we think yields in the belly of the yield curve (five-year and seven-year Treasuries) will need to rise to reflect this higher probability.

This could change the timing of an interest rate hike that is currently expected in 2023 at the earliest. At least for now, it's too early to move that timing forward; the data is too volatile and the outlook is too uncertain for the Fed to make any major adjustments. What we're seeing today is not due to a virtuous labour demand-driven inflation cycle (fundamental), but the reopening of the economy and supply bottlenecks, which we view as temporary. That could change.

If we see a string of strong employment reports (narrowing the gap on the record 8 million job vacancies in March) AND a bigger fiscal package AND core inflation trending above 2.5%, it would certainly put the Fed in play for an earlier taper and rate hikes than what we are expecting. However, it's also worth remembering that the Fed wants to see inflation above or at its 2% target rather than constantly undershooting, as well as broad-based and inclusive employment.

So, a reset of inflation at a higher level is consistent with the central bank’s long-term goals. The Fed’s June 16 meeting should provide some indication of their thinking. Lastly, it’s worth recapping that in 2011, after the global financial crisis (GFC), inflation did not stay above 3% for long because of unanticipated negative post-GFC shocks. That could happen again.

Inflation outlook across the rest of the world

Tapering has already been announced by the Bank of England and the Bank of Canada. The Bank of England expects activity to rebound strongly as the economy re-opens and recent indicators have shown greater resilience in the real economy despite continuing mobility restrictions. Furthermore, higher global commodity prices are encouraging industrial companies to raise prices and retailers are now expecting higher selling prices. That said, CPI inflation remains below target and, with substantial spare capacity, underlying inflationary pressures are muted. UK policy rates are likely to remain on hold till there is greater clarity over the speed and scale of the economic recovery.

1. Source: The Bureau of Labor Statistics as at 12 May 2021.


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Jared Franz is an economist with 16 years of industry experience. He holds a PhD in economics from the University of Illinois at Chicago and a bachelor’s degree in mathematics from Northwestern University.

Tim Ng is a fixed income portfolio manager at Capital Group. As a fixed income investment analyst, he covers US Treasuries, TIPS (Treasury Inflation Protected Securities, a type of Treasury security issued by the US government.), and interest rate swaps. He has 16 years of investment industry experience and has been with Capital Group for eight years. He holds a bachelor’s degree with honors in computer science from the University of Waterloo, Ontario. Tim is based in Los Angeles. 

Jeremy Cunningham is an investment director at Capital Group. He has 35 years of industry experience and has been with Capital Group for six years. He holds the Chartered Financial Analyst® designation. Jeremy is based in London.

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Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.