Chart of the week: US’s inflation fate with higher tariffs

July 30, 2018
Chart of the week: US’s inflation fate with higher tariffs

25 July 2018

Bob Cunneen, Senior Economist and Portfolio Specialist

                                      US inflation vs interest rates

 

Sources: Federal Reserve Bank of St Louis and Federal Open Market Committee (FOMC) meeting minutes for June 2018. 

US’s price pressures continue to buildThe Core CPI Index measure (which excludes volatile food and energy prices) shows US inflation was running at a 2.3% annual pace in June (blue line). This places core US inflation above the central bank’s 2% inflation target as well as their current policy interest rate range between 1.75% to 2% (red line). Indeed the US Federal Reserve (Fed) has noted recently that “many business contacts indicated that they were experiencing rising input costs, and, in some cases, firms appeared to be passing these cost increases through to consumer prices”. 

President Trump’s current strategy of imposing tariffs on imported goods provides further upside risk to US inflation. The recent tariffs on steel, aluminium and select imports of electronics and machinery from China have yet to be fully passed on to US consumers. The threat of US tariffs on European car imports would also have a significant impact on US consumer prices should these materialise. As a rule of thumb, a broad 10% tariff would raise US consumer prices by a further 0.2% based on historical measures.* 

For the Fed, this tariff strategy only adds pressure to further raise US interest rates.  While the Fed’s guidance is that future interest rate rises should be “gradual”, the reality is that these ‘Trump tariffs’ could force the Fed to accelerate the pace of interest rate rises to keep US inflation in check.

*Estimates for the 10% tariff impact on US inflation are based on our calculations of the “Yellen inflation model” which shows a coefficient of 0.26 for imported good prices from China, Europe and Japan. 

Source : Nab assestmanagement 25 July 2018 

Important information

This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (“MLC”), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) group of companies (“NAB Group”), 105–153 Miller Street, North Sydney 2060. An investment with MLC does not represent a deposit or liability of, and is not guaranteed by, the NAB Group. The information in this communication may constitute general advice. It has been prepared without taking account of individual objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs. MLC believes that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice). MLC relies on third parties to provide certain information and is not responsible for its accuracy, nor is MLC liable for any loss arising from a person relying on information provided by third parties. Past performance is not a reliable indicator of future performance. This information is directed to and prepared for Australian residents only. MLC may use the services of NAB Group companies where it makes good business sense to do so and will benefit customers. Amounts paid for these services are always negotiated on an arm’s length basis.

Powered by WPeMatico