Should we expect inflation to slow down in the US?

At the end of December, the US registered a year-on-year inflation rate of 7%, the highest rate in more than 40 years. This rate prompted a big debate among economists about what should we expect the inflationary trend to be and, specially, if there were aby available signs that indicated that inflation could be slowing down. Many pointed out that a 7% year-on-year rate wasn’t so bad if we analyzed the inflationary trend and just that isolated number.

Many economists have claimed that expectations remained anchored in the US, even in December. American analysts did a good job with their predictions for inflation, as the 7% didn’t deviate too much from the consensus estimated. An important fact that has been presented by many as a sign of inflation slowing down is that it has just increased by 0.2 percentage points since November, when year-on-year registered inflation in the US was 6.8%, whilst in October and November it increased by more than 1 and 0.5 percentage points respectively, in contrast with the previous month. This seems to show that the acceleration of inflation can be expected to come to an end, which is partially corroborated by the fact that month-on-month inflation fell to 0.5% in December, from a top 1% in October, registering even a month-on-month deflation in energy prices in the last month of 2021.

On top of it, another important factor that helps to think that inflation expectations are still anchored in the US and that the overall trend may be slowing down is the evolution of wages. For the moment, wages are not growing above inflation, preventing the creation of a wage-price spiral and a general overheating of the whole American economy.

However, this is not the whole story, as there are also some aspects of the American economy and the evolution of prices that lead to think that high inflation rates may not be slowing down nor coming to an end in the US.

Firstly, even though month-on-month inflation slowed down to 0.5% in December, even though coming from higher rates in October and November is not good at all, as a month-on-month rate of 0.5% over a year will mean a year-on-year average inflation of 5.6%. Furthermore, even though year-on-year inflation is following estimations and expectations, core inflation in the US has risen from 4.9% to 5.5% in just one month, which means that inflation could rapidly spread to salaries and heavily affect many intermediate and consumption goods across the economy in a larger way than expected. Core inflation also increased when measured month-on-month, from 0.5% up to 0.6%, worsening the trend, and being above estimations.

For the moment, nominal wages are increasing below inflation, which means that real wages are falling, and consumers are losing purchasing power, which could lead to a reduction of consumption in the near future and a possible contention of inflation. However, up to November, wages were increasing at a 4.3% year-on-year rate, which is still a risk for the lengthening of high inflation.

Finally, we should also bear in mind that productive and logistic bottlenecks probably won’t be solved in the near future due to the evolution of global value chains and the delay in the delivery of many essential intermediate goods, which could worsen inflationary trends.

In conclusion, even though we can find some signs of a mild moderation of the acceleration of inflation trends, there are still many other factors that point in the opposite direction, showing that inflation will probably still keep on rising over the next few months due to the evolution of wages and ongoing production and supply bottlenecks.