US: Inflation undershooting - Westpac

Analysts at Westpac points out that from a peak of 2.8%yr in February, US headline CPI inflation abruptly fell back to 1.7%yr in July and similarly core inflation from 2.3%yr in January to 1.7%yr.

Key Quotes

“In their recent communications, the FOMC has continued to hold that this rapid deceleration in the inflation pulse is a temporary phenomenon. This is true, but increasingly it seems that as one transitory disinflation pressure abates, another comes to the fore.”

“In this sense, if consecutive waves of disinflation are seen, then ‘transitory’ becomes structural. Wireless telephone services and hotels are both examples that face increased competition thanks to technological progress.”

“Another important aspect of the outlook is wages growth. Here the ‘renewal’ of the labour market is lowering its cost base, limiting both supply and demand-driven inflation. Changes to benefits are also a significant factor.”

“The current pace of inflation allows the FOMC to raise rates once or twice more before a real neutral rate of zero is achieved. From there however, action will be much more difficult to justify.”