Has America Really Escaped Inflation?

The prospect of a recession, as indicated by the balance of historical measures, complicates the Fed’s rate cutting decision. This article by The Economist usefully unpacks some details.

The Economist article discusses America’s sustained economic growth, challenging the notion that the country has escaped inflation. Despite expectations of a slowdown, the US economy grew significantly in late 2023, with robust consumer spending and strong wage growth, particularly among lower-income workers. This growth, coupled with a decline in inflation, suggests a potentially favorable scenario for the Federal Reserve to cut interest rates. However, there are concerns that this decline in inflation might be temporary, and a resurgence could necessitate keeping interest rates high, renewing recession fears.

DL’s Take: March Rate Cut a Toss Up

At some point American economic growth will disappoint expectations. For now, though, it appears to have ended 2023 much as it passed the previous few years, with yet another expansion that defied forecasts. Recent data suggest that the economy grew at an annualized pace of 2.5% or so in the final three months of the year, more than twice the median expectation of analysts at the start of the quarter.

Although such momentum is welcome, it complicates the outlook as the Federal Reserve contemplates when to start cutting interest rates. America’s strength is broad-based. Investment in manufacturing facilities has soared to record highs, propelled by the Biden administration’s subsidies for electric-vehicle and semiconductor production. Elevated mortgage rates have led to big falls in sales of existing houses, but property developers have responded to the dearth of single-family homes on the market by ramping up building. The government has remained a backstop to growth—albeit a worrying one from the standpoint of long-term fiscal sustainability—with its deficit running at about 7% of GDP, which is virtually unprecedented during peacetime without a recession.

Read more (subscription may be required): Has America really escaped inflation? – The Economist

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