Fed Chair Jerome Powell is resolute in his belief that the burst of stronger inflation we are about to see will prove temporary, with underlying inflation dropping back to the 2% target next year. We are not convinced. Given the breadth of the upward pressure on not just prices but wages too, we believe this will develop into a sustained wage-price spiral. We expect core inflation to consistently exceed the Fed’s target over the next few years although, with the Fed more focused on achieving its inclusive full employment goal, we still don’t expect the Fed to begin hiking interest rates until 2023.
Drop-In: US non-farm payrolls and the labour market outlook -Friday 7th May, 1000ET/1500 BSTJoin Chief US Economist Paul Ashworth and Senior US Economist Michael Pearce following the release of the April NFP data for a discussion about the state of the US labour market’s recovery, and its impact on Fed thinking. Click here to register.
The unchanged reading for retail sales in April is slightly stronger than it looks given that it follows an upwardly revised 10.7% m/m surge in March, and it suggests that the boost from the $1,400 stimulus cheques has only partly faded. Nevertheless, as goods spending inevitably drops back over the coming months, we were hoping for an offsetting rebound in services. But food services sales only increased by 3.0% last month, a marked slowdown on the March gain, which is a hint that labour shortages and the resulting surge in wages and prices may be acting as a constraint on the recovery in real activity.