Current U.S. real economy inflation levels have rebounded only marginally, with December CPI at 1.6% year-over-year and core CPI at 1.4% year-over-year, both below pre-epidemic levels and the Federal Reserve’s inflation target. Looking ahead, with the rollout of the vaccine and economic recovery, will U.S. real economy inflation pick up quickly in the later stages?
2021 is an important turnaround year for the U.S. fight against the epidemic and the economic recovery. On the one hand, Biden was successfully inaugurated as the US President and the Democrats successfully achieved control of both houses of Congress, while former Fed Chair Yellen, who advocates active finance, was confirmed as the new treasury secretary. The possibility of fiscal stimulus has greatly increased, and Biden has proposed an additional fiscal stimulus plan with a size of $1.9 trillion. On the other hand, the pace of vaccination in the U.S. has also been significantly accelerated since mid-January, with Biden fighting the epidemic more aggressively. It is expected that in the context of fiscal stimulus and vaccine rollout, the U.S. economy will likely achieve recovery in 2021, and the IMF has recently revised its 21-year U.S. economic growth forecast significantly upward from 3.1% to 5.1%.
Against the backdrop of an increasingly clear economic recovery trend, the U.S. inflation risk is also a cause for concern. First, this time the U.S. stimulus measures in response to the epidemic shock have made its broad money grow significantly and monetary conditions for inflation already exist. Second, current U.S. stock prices, home prices and other asset prices have risen to some extent, with the S&P 500 index rising 16% in 2020 and the U.S. home price index for the top 20 cities increasing 9% year-over-year in November.
Again, inflation expectations in the financial markets have also risen significantly, reflecting inflation expectations in the bond market TIPS inflation compensation indicators rose to about 2%, while commodity prices such as copper and crude oil have also risen sharply.
Current U.S. real economy inflation levels have rebounded to a limited extent, with December CPI at 1.6% year-over-year and core CPI at 1.4% year-over-year, both below pre-epidemic levels and the Federal Reserve’s inflation target. Looking ahead, with the rollout of vaccines and the recovery of the economy, will U.S. real economy inflation pick up quickly in the later part of the year? This article explores the subsequent U.S. inflation trend from the perspective of the supply and demand gap.
”On January 6, the Democratic Party took two Senate seats in Georgia, thus finally achieving a “Democratic sweep” in the current round of presidential and bicameral elections. The U.S. economic policy decision-making process will be smoother, and the possibility of the U.S. continuing to increase the fiscal stimulus is greatly increased. In addition to the previous two rounds of large-scale fiscal relief program, this time Biden proposed another $1.9 trillion relief bill, and the market and the media generally expect the new U.S. government will also implement additional infrastructure investment and new energy spending plans.
At the same time, the new U.S. government appointed Yellen, who advocates active finance, as U.S. treasury secretary. Given Yellen’s previous experience as chairman of the Federal Reserve and in monetary policy formulation, the U.S. fiscal and monetary policies are expected to be further coordinated. As fiscal spending directly on the demand side, the current market is generally expected to further increase the fiscal stimulus will form a strong boost to U.S. aggregate demand.
The current round of U.S. broad money surge has formed a huge potential demand, which will also be released with the spread of vaccines. This loose fiscal and monetary policy has led to a sharp rise in U.S. M2, with the U.S. M2 balance increasing by $4 trillion year-on-year to $19.4 trillion in December 2020, a 25.7% year-on-year increase, the highest growth rate since the mid-19th century. Behind the big increase in broad money is an increase in deposits in the residential and corporate sectors, creating a huge potential nominal demand. According to U.S. financial accounts statistics, cash + deposit-type assets of U.S. residents and nonprofit organizations increased by about $2.25 trillion in the first three quarters of 2020, accounting for 70.6% of the increase in U.S. M2 over the same period; cash + deposit-type assets of nonfinancial corporations increased by about $900 billion, accounting for 28.6% of the increase in U.S. M2 over the same
Further, the vaccination schedule in the U.S. has started to accelerate since mid-January, which is expected to gradually drive the nominal demand accumulated in the previous period. According to CDC data, as of January 26, the number of people who received one dose of vaccine from the federal government accounted for about 6% of the total population. The total number of vaccines currently ordered in the U.S. has reached 600 million doses, which is expected to make the vaccine cover basically the entire population in this summer. The US service consumption was seriously lower than the medium and long-term trend value in the previous period due to the impact of the epidemic. With the sound income and balance sheet of the residents, the service consumption is expected to achieve compensatory growth after the gradual control of the epidemic in the later period; the consumption of non-durable goods is expected to continue to recover; the consumption of durable goods may fall slightly due to the release of demand in the early period and the subsequent rebound of interest rates. At the same time, the current U.S. manufacturing, wholesale and retail inventory levels are at historically low levels, and late replenishment demand is also conducive to the rebound in U.S. aggregate demand.
Current U.S. industrial production and capacity utilization are gradually picking up, with the U.S. Industrial Production Index recovering to -3.6% year-over-year in December and industrial capacity utilization recovering to 74.5%, but industrial production growth and capacity utilization are still lower than before the outbreak. As vaccines are rolled out and production activities become more adaptive to the epidemic, the U.S. production side will recover toward pre-epidemic levels. However, overall, it is difficult to see a significant expansion in production capacity in the short term for two main reasons: on the one hand, on the labor supply side, while the current U.S. unemployment rate is moving downward rapidly from the worst phase of the epidemic, permanent unemployment is on the rise, constraining production recovery. On the other hand, on the capital supply side, the only way to significantly expand existing capacity is to increase investment, but compared to the immediate one-time pull of investment on demand, its contribution to capacity expansion is often phased across time, making it difficult to bridge the supply and demand gap in the short term.
In 2021, the U.S. economic recovery will continue to show “strong demand and weak supply”. The demand side is mainly driven by the accumulated residential and corporate deposits and further fiscal stimulus, and the vaccine rollout will provide conditions for the release of demand, while the production side is still recovering towards the pre-epidemic level, and it is difficult to expand significantly in the short term.
And with continued monetary easing, inflation expectations in the U.S. have been elevated, as reflected in TIPS inflation compensation and commodity prices have risen significantly, and inflation expectations are easily self-fulfilling against the backdrop of the supply and demand gap. In fact, the strength of U.S. durable goods consumption after the epidemic has driven durable goods prices stronger, and the increase in U.S. imports has driven the import price index upward.
In addition, the current U.S. monetary authorities have implemented a 2% average inflation targeting regime, which means that monetary policy is not tightened immediately in the event that inflation phases out above 2%. In the supply and demand gap, inflation expectations, monetary easing and other multiple factors, we believe that the trend of rising U.S. inflation is relatively clear, and the follow-up still needs to pay attention to the risk of U.S. inflation rising too fast.