“Inflation in the United States will be tenacious”

The consensus was right: US inflation is falling. The consensus was wrong: core inflation, excluding food and energy, rose in August. It is now clear that inflation will be much harder to defeat than many economists believe. The Federal Reserve will therefore not disarm and the equity markets will remain under pressure. Why is inflation proving so tenacious? Admittedly, the production chains have been gradually reorganized. Delivery times are decreasing, and as a result, the prices paid by companies. The scarcity effect of some products is fading. Certainly, energy and food prices are well below their recent highs. And so certainly, US inflation will fall.

But slower than many believe. The domestic factors of US inflation have unfortunately taken over. Employment resists, and even resists very well. An unemployment rate close to 3.5% generates wage increases. And the latter, supported by overabundant savings in the wake of covid, will allow American consumers to accept price increases. Admittedly, wage increases will slow down, but very gradually, because it is vital for employees to obtain enough to support their purchasing power in times of inflation, and they will be able to obtain it thanks to a labor market tense.

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Another very important factor is probably underestimated by economists: the rise in rents. History shows that rents increase with a one-year lag after the rise in house prices. The relationship is not perfect, but still quite strong, and altogether intuitive: there is a trade-off between buying and renting. And house prices have risen sharply in the past year, rising more than 30% since the start of the pandemic. Rents should therefore increase in 2023, and thus support inflation.

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For our part, we estimate that US inflation will approach 5% in 2023, while the consensus expects 3.5%. And for investors as for Jérôme Powell, there is a world between these two figures.

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