The consensus was right: US inflation is falling. The consensus was wrong: core inflation, excluding food and energy, rose in August. It is now clear that inflation will be much harder to defeat than many economists believe. The Federal Reserve will therefore not disarm and equity markets will remain under pressure. Why is inflation proving so persistent? Of course, the production chains have been gradually reorganized. Delivery times are decreasing and, consequently, the prices paid by companies. The shortage effect of some products is fading. Certainly, energy and food prices are well below their recent highs. And then, surely, inflation in the United States will go down.
But slower than many believe. The internal factors of US inflation have sadly taken over. The occupation resists, indeed it resists very well. An unemployment rate close to 3.5% generates wage increases. And the latter, supported by overabundant savings in the wake of covid, will allow American consumers to accept price increases. Sure, wage increases will slow down, but very gradually, because it is critical that employees get enough to sustain their purchasing power in times of inflation and they will be able to get it thanks to a tense labor market.
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Another very important factor is probably underestimated by economists: rising rents. History shows that rents rise a year later after the rise in property prices. The relationship is not perfect, but still strong enough and completely intuitive: there is a trade-off between buying and renting. And house prices have risen sharply over the past year, rising more than 30% since the start of the pandemic. Rents are therefore expected to rise in 2023, and thus support inflation.
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For our part, we estimate that US inflation will approach 5% in 2023, while the consensus predicts 3.5%. And for investors like Jérôme Powell, there is a world between these two figures.
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