The US inflation problem and its consequences
Due to the increased US inflation risks, we revised our forecast for the fed funds target rate at our monthly forecast meeting.
Commerzbank Economic Research
April 19 2024
Why US consumer prices have recently risen unexpectedly sharply
At our monthly forecast meeting, the focus was on US inflation. This was mainly due to the inflation data for March, which was published last week. According to the data, US consumer prices excluding energy and food ("core rate") rose unexpectedly sharply by 0.4% compared to February. Over the last three months, prices have risen by a strong 6.8% on an annualized basis (Chart 1). The central bank's 2% target is receding into the distance after inflation fell significantly in the second half of last year and many observers – not us – had proclaimed victory over inflation.
But wage increases are past their peak, ...
However, wage growth, which is important for service inflation, is already slowing. According to calculations by the Atlanta Fed, the median wage (a statistically better measure than average hourly earnings published as part of the employment report) was only 4.7% higher in March than a year earlier (Chart 3). Wages measured in this way have therefore not risen more strongly than service prices (excluding housing) over the past twelve months. This means that wages are unlikely to push up service inflation for much longer. In the medium term, price pressure in services should even fall if wage growth continues to weaken.
... which has to do with high immigration
At first glance, the slowdown in wage growth does not match the extraordinarily robust employment trend. A good 250 thousand new jobs were created on a monthly average in 2023. Conventional estimates assume that the US labor market needs around 100 thousand new jobs per month to put the growing population to work. Job creation that significantly exceeds this threshold for an extended period of time would drain the pool of available workers and lead to an overheating labor market.
However, these calculations do not take into account the enormously high level of immigration since the end of coronavirus, which has significantly exceeded all previous forecasts. An annual average of 3 million people entered the country in 2022 and 2023 – three times as many as before coronavirus. Immigration is also expected to be well above average in 2024 and 2025. The Congressional Budget Office had to drastically increase its population projections within a year.
