Raising our inflation forecasts for the US
The US vaccination drive continues to progress steadily and new coronavirus cases have fallen to the lowest level since June last year. Economic reopening continues apace, and services most affected by the pandemic such as travel and leisure continue to regain ground. In these circumstances, we are maintaining our 2021 GDP growth forecast for the US of 6.5% (after a contraction of 3.5% in 2020). We expect GDP growth to be firmest in Q2, when it could reach a seasonally adjusted 10.0% quarter on quarter.
Recent data show consumer spending remains reasonably buoyant, thanks to federal support and accumulated savings. We expect the savings rate to continue to decline, but at a gradual pace. We still have doubts about a ‘roaring twenties’ in terms of consumer spending scenario. The savings rate should continue to decline, but at a gradual pace. Importantly, we think the credit cycle could lag the recovery.
The US labour market seems to be less vigorous than GDP. It is still too early to disentangle the impact of productivity (and labour-saving) investments made during the pandemic from the generous federal unemployment benefits that could be a disincentive to work.
The most recent change to our forecasts relates to inflation as supply-chain bottlenecks and shortages in manufacturing seem to be more widespread and durable than initially anticipated. These bottlenecks could last for several months. Along with rising commodity prices, these bottlenecks have led us to raise our inflation forecasts. We now see 2021 core PCE inflation averaging 2.4%, up from 1.8% previously. We expect headline CPI inflation to average 3.4% in 2021, versus our previous expectation of 2.6%.
Crucially, we still do not forecast second-round inflationary effects from these developments, be it in the form of a wage-growth spiral, un-anchored consumer inflation expectations, or a sudden unleashing of credit. Wage growth in particular seems relatively contained despite anecdotes of rising pay for positions difficult to fill.
We continue to think the Federal Reserve will remain relaxed about rising inflation, which it mostly sees as temporary. It is unlikely to bring forward its plans to raise interest rates. In a word, we continue to think the Federal Reserve will not hike rates before mid-2024 and that rate rises will remain limited thereafter.
In the near term, however, pressure could rise on the Fed to start sending signals about slowing its USD120 bn per month asset purchases, especially as GDP growth remains solid and vaccinations continue apace. Such signals could come in the third quarter, and potentially during the Jackson Hole conference in late August. We still do not see the first effective reduction of purchases before January 2022, although risks exist of an earlier start.