Economists: U.S. to Face Greater Inflation

After several years of weak inflation, economists now believe Americans will see higher prices in 2016 and beyond.  Weak inflation that fell into near deflation in 2015 has reversed course, with the U.S. consumer price index (CPI) rising to its highest point since 2013. The CPI for all items rose over 1.1% in April, and has shot up markedly after falling earlier in 2016. Excluding food and energy, the CPI rose over 2.1% in April.

After several years of weak inflation, economists now believe Americans will see higher prices in 2016 and beyond.  Weak inflation that fell into near deflation in 2015 has reversed course, with the U.S. consumer price index (CPI) rising to its highest point since 2013. The CPI for all items rose over 1.1% in April, and has shot up markedly after falling earlier in 2016. Excluding food and energy, the CPI rose over 2.1% in April.

That has led many economists to argue for even greater price increases in the future for goods and services throughout the U.S. economy. The inflation is expected to also be driven by the Federal Reserve, who is now largely expected to increase borrowing costs in June, when it will decide on interest rate targets for short-term U.S. Treasuries.

Many large investment firms are encouraging clients to prepare for greater inflation, and economists are adding to those warnings by noting that many indicators of aggregate demand, such as retail sales growth, indicate higher prices are around the corner.

Blackrock, the world’s largest bond investment firm, released a report noting that higher inflation is being driven by increased costs for manufacturers. “Our analysis suggests rising U.S. inflation pressures will persist, as factory-gate price increases are passed on to consumers,” the company said in a report, adding that a variety of factors are causing prices to rise.

“It is not just the rebound in energy prices pushing inflation higher. An appreciating U.S. dollar is abating as a headwind. Prices of more stable service-based components of the CPI are also rising,” the report added.

While this will make living costs higher for Americans, Blackrock also believes that salaries are set to rise. “Wages, too, are moderately increasing, as are survey-based consumer inflation expectations,” the firm noted. Blackrock also believes this will drive the Fed to increase rates in the next few months. “The odds of the Fed increasing rates this summer have increased, although we see only one to two rate increases this year amid slow U.S. growth,” the firm said in its report.

Blackrock was also joined by two other investment firms, both banks, who sent notes to clients urging them to hedge against inflation as rising interest rates and a renewed American economy will drive prices up.

Markets have increasingly priced in an interest rate hike in June, with short-term Treasury yields rising on Monday and futures markets indicating more rises to come. Federal Reserve Chairwoman Janet Yellen will speak on Friday, and she is widely expected to give the market another hint that rates are going to rise sooner rather than later.