US inflation – peaking soon?

Key points

• Over the past four months, CPI inflation in the US has run at over 5 per cent year-on-year, the highest since mid-2008, and was 5.4 per cent in September. Prior to 2008, the previous time headline CPI inflation was this high was in 1991. A key question of policy debate is whether this increase in inflation will be just temporary, as in 2008, the start of a prolonged period of inflation above the 2 per cent target, or worse still whether inflation will continue to escalate as it did in the 1970s and early 1980s. Either of the latter two outcomes will represent a significant monetary accommodation by the Federal Reserve and a departure from the recent monetary policy practice.
• We think that this burst of higher inflation is more likely than not to be temporary. We document that a range of core US inflation measures, although having risen, have remained more subdued than headline measures. We examine past relationships between core and headline inflation and projections based on stylised assumptions about the path of monthly inflation. While our exercises do suggest that relatively high inflation is likely to persist well into next year, they do not point to an inexorable rise in inflation as in the 1970s for now. Much will, of course, depend on how firms and households respond to several quarters of higher inflation and whether they will change their expectations of medium-term inflation.

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