Will inflation in America finally take off?

published 7 November 2014

Inflation in America has been subdued in recent years. But that will change, says Ana Gil on Bondvigilantes.com. One reason to think so is residential rents, which comprises 40% of the core inflation measure (inflation excluding volatile food and energy prices).

Vacancy rates are at an all-time low, suggesting the market is tightening quickly. Rents thus look likely to rise by 4%-4.5% in the next 12 months. Health-care costs, also a key component of inflation, are on an upward trajectory, with Obamacare increasing demand against "a relatively constant supply".

Meanwhile, the unemployment rate has fallen below 6% and most surveys of employee compensation reveal that "broad-based wage pressure is here", says Deutsche Bank.

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The quarterly Employment Cost index, which was the main wage gauge the Fed watchedduring the 1990s, shows that wages and salaries rose at an annualised pace of 3% in the third quarter.

The widely watched average hourly earnings measure has yet to follow suit, but this tends to track the number of firms planning to increase compensation, households' income expectations and the number of job openings. These indicators are all rising robustly, especially the latter, which has reached a 12-year high.

Analysts now reckon the tight labour market may prompt interest-rate hikes sooner rather than later.

And given that central bankers are often too slow to move to quash inflation, it may not be long before they start to fret about theFed letting inflation soar out of control.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.