US core inflation: better wait for the encore

Tom Traill - 19 April 2018

As far as we are aware, unlike the Fed or the ECB, inflation doesn’t have a favourite number.  We never cease to be amazed by inflation forecasts that stop at 2 per cent, as if the guardians of monetary policy had an instant braking mechanism for inflationary pressures. We find no evidence to suggest that 2 per cent is a barrier that will be reached but not surpassed.  In a US context, there is every indication that core (ex-food and energy) CPI inflation will breeze straight through the Fed’s objective.

Annual headline CPI inflation was 2.4 per cent pa in March, having increased from 1.6 per cent nine months earlier. Core CPI inflation, at 2.1 per cent, is also on an upward trajectory. The manufacturing ISM survey has a good record of anticipating core CPI inflation, with an average lead of around 2 years (figure 1).

Wage inflation continues to strengthen: average hourly earnings growth was 2.7 per cent but, more importantly, average weekly earnings growth reached 3.3 per cent in March. Average hourly pay might capture the headlines, but average weekly earnings offer a more reliable gauge of the inflationary situation. Those who are willing to switch jobs can secure a 4.4 per cent pay rise, on average, according to the Atlanta Fed, suggesting the labour market continues to tighten.

US factory output prices remain strong, suggesting that inflation has infiltrated US manufacturing, and US import prices (in US Dollar terms) were 3.6 per cent higher in March than a year ago – indicating more upward pressure on CPI. Emerging market inflation is also increasing, so this trend is likely to continue. The ISM readings on inflation give clear warning of the direction of travel.

Inflation projections by the Cleveland Fed and the university of Michigan converge obediently on 2 per cent, like a well-trained dog. Actual inflation is an unruly mutt that leaves muddy footprints on the carpets and bites the postman. US core inflation is edging higher but there is plenty more where that came from: better to wait for the encore.


Figure 1

Data source: Thomson Reuter Eikon

We are hosting a breakfast presentation in London on Wednesday next week where Peter Warburton will discuss ‘The Little Inflation With The Big Bite’ details can be found HERE. Please RSVP if you would like to join us.



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