Will Inflation Pick Up In The US?

The shift to the services economy, with large inputs of a technological nature, may be the reason why low inflation is so sticky, despite the printing of money.

- Maarten Mittner

The pressure on authorities to implement additional fiscal stimulatory measures to augment easing monetary policies from the central bank has reached a new crescendo in the US. But consensus on a new fiscal package to boost the economy has been elusive.

The big question is whether additional fiscal measures will lead to an uptick in inflation as anticipated by some analysts, and so provide renewed support for equity markets.

It was predicted that the massive stimulus measures of 2008 and 2013 would at some point lead to increased inflation in the US. But that has not happened, even in an environment of full employment. The US Federal Reserve (the Fed) has already indicated it overestimated the effect of higher inflation following through from the stimulus actions, even though it still believes inflation could rise in future.

At this stage, the Fed is still sticking with easing policies by making it clear that rates will remain at or around zero for some years to come. But, in addition, it has set a target for inflation to pick up over the medium term as the economy recovers and demand improves.

The productivity gains from the economic resurgence in China, together with the cheaper production methods of the big tech companies, are usually cited as reasons why inflationary pressures remain muted. Low wage growth, despite strong consumer spending, has also helped.