US | Inflation will be sticky but not oppressive

The US economy is unlikely to experience an inflation regime shift. But after a decade of glacial price rises in the wake of the financial crisis, it will experience a prolonged period of warm inflation above the Fed’s 2% target. That stickiness will initially reflect post-Covid supply and demand imbalances, but from 2022 onward, it’ll reflect sustained economic and labor market strength.

What you will learn:

• As of mid-2021, we see only a 10-15% chance of the US economy shifting into a high-inflation regime (persistently above 5%), and we find that such a shift generally requires a combination of factors and takes multiple years to occur.
• While business pricing power is near record-highs, we believe an inflationary psychology is unlikely to settle in. Instead, we see a negative demand response, which should lower price pressures, in sectors with the highest inflation.
• Similarly, while lower-paying jobs are getting unprecedented wage growth, we believe this reflects a one-time releveling of low wages rather than a permanent shift in workers’ bargaining power.