The Macro Report | May 2018

The inflation conundrum


Our outlook contains some small but noteworthy shifts. Rising oil prices are expected to lift slightly the trajectory of inflation in the United States because of the pass-through to consumer prices. A stable economy and a tight labor market have also pushed prices toward the Federal Reserve’s 2% target. Fed officials called attention to the “symmetric” nature of their target in a May statement, signaling they expect inflation to run at least a little above target this year. The growth outlook for the United States is also shifting. While we expect a late-cycle boost in growth driven by the fiscal stimulus, it will be a little less pronounced due to higher oil prices, lackluster corporate investment, and trade policies. Abroad, central banks are reacting to different dynamics. As the Fed gradually tightens monetary policy, the European Central Bank remains cautious in providing a clear timeline to remove stimulus. In the eurozone, inflation continues to remain below the ECB’s target. In Asia, China’s central bank unexpectedly reduced the cash that banks hold as reserves, a move that frees up lending for small firms and reduces funding costs. Meanwhile, higher U.S. rates, a stronger dollar, and political uncertainties have weighed on emerging markets.


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Our outlook contains some small but noteworthy shifts. Rising oil prices are expected to lift slightly the trajectory of inflation in the United States because of the pass-through to consumer prices.