U.S.: Higher inflation and firm economic recovery - UOB

FXStreet reports that UOB Group’s Head of Research Suan Teck Kin, CFA, and Senior Economist Alvin Liew assess the U.S. outlook.

“The recent US Treasury yields surge was attributed to the vaccine-driven reflation expectations, US to “go big” on fiscal stimulus, and inflation fears that could lead to earlier than expected monetary policy tightening.”

“Even though latest US inflation outcomes remained benign, they are lagging indicators and the crux of the issue is expectations of higher inflation have been building up, reflected in the jump in TIPS as well as consumer expectations.”

“The key supporting factors to US inflation in 2021 include the acceleration in growth of personal consumption. capital spending, housing, and inventory builds of which these sectors had been the main contributors to the US’ recovery process last year. The US savings rate is expected to normalise as US consumers resume their social and travel activities and increase spending. If the consumer spending surge is formidable, then so will be the inflation risk. The key downside for prices is the significant slack in the labour market.”

“We see US inflation rate to be trending higher, not yet at the “overheating” stage but the balance of risks is increasingly tilted to the upside. Our US 2021 growth forecast remains at 4.5% but risks are for even higher growth, potentially due to the upside on successful vaccine rollouts and more fiscal stimulus into the US economy. We now expect headline inflation forecast to average 1.7% in 2021 (from previous projection of 1.2%), with the risks also biased to the upside.”