US: Three conditions for inflation to return – Natixis


Financial markets and US households believe that inflation is going to return in the United States, even though actual inflation remains low. Economists at Natixis look at the three conditions that would have to be met for inflation to actually return in the United States.

Key quotes

“The huge household income support provided through public transfer payments led to a rapid increase in household disposable income at the same time as consumption fell, i.e. to a sharp rise in the savings rate. Having resulted in a sharp increase in household deposits, it will persist in 2021. For there to be inflation, the first condition is that these excess household savings must turn into consumption.”

“Let us assume that the excess savings are actually consumed and not invested. For there to be inflation, this additional consumption would have to be mainly of services. If it is consumption of manufactured products, this additional consumption will be met by imports and there will be no inflation. It is this dynamics that is appearing at present. If demand for services (non-tradables) did rise sharply, there would be a sharp increase in employment in the services sector, which would lead more rapidly to labour market pressures.”

“Let us assume that strong labour market pressures rapidly appear. It is important to remember that when this was the case in 2018-2019, core inflation in the US remained low. Phillips curve effects are very weak in the US. Also, the institutions and functioning of the labour market are the same in 2021-2022 as they were in 2018- 2019. Wage earners do not have more bargaining power and, for the time being, there has been no increase in the minimum wage.”


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