The United States appears to be an exception in the global inflation picture. Why it matters.
There is currently a raging debate about US inflation and whether it will be persistent. But more importantly, there is a debate about the inflation regime we currently find ourselves in. We spent 20 years before Covid in an era of disinflation and many believe we are in a new era of higher inflation.
American investors tend to focus too much on the United States and its economic history, and ignore what is happening in the rest of the world. Often the overall signal is the one that cuts through the noise. Remember, this was not just the US in a disinflationary period before Covid, but the entire world.
So, what is currently happening in the rest of the world with inflation:
- UK CPI 3.4% year-on-year versus 3.5% expected and 4.0% previously
- German HICP 2.3% over one year versus 2.4% expected and 2.7% previously
- Eurozone HICP 2.4% versus 2.6% expected and 2.6% previously
- Canada March CPI 2.8% year-on-year versus 3.1% expected. BOC basis 2.1% over one year
- Mexico core CPI in March 0.44% m/m versus +0.51%. Overall title 4.42% versus 4.50% over one year expected
- China CPI in March +0.4% year-on-year versus +0.7% previously, including -0.5% m/m
Compare that with the United States, which has recorded three high inflation reports in a row, including Wednesday’s report, which rose 3.5% year-over-year, compared to an expected 3.4%.
Despite the American setback, they increasingly believe in the emergence of a return to the type of inflation that dominated the first 20 years of the century. The counterargument is that globalization is in decline, but I don’t see it that way. Globalization is slowing but the dividends continue to be collected and, given China’s current slowdown, it is exporting ever more deflation.
It is also obvious to me that AI, automation and robotics will be deflationary forces (although not in commodity markets initially).
Why is the United States bucking the trend?
Some things I’m thinking about:
1) Budget expenditures
The United States has not reduced its budgetary spending in the post-Covid period. The federal government is running deficits of 6-7% of GDP as IRA and CHIPS Act money continues to flow through the economy in 2024 and 2025.
2) American consumers own stocks
Americans are far more likely than anyone else to hold stocks in their savings portfolios. Needless to say, this has been an incredible bull market and, given the wealth already present in America, consumers have been overwhelmed. Add in 30-year fixed mortgages, pandemic relief and a tighter job market, and the United States is supercharged.
Superb painting by Jim Bianco
3) Housing data is biased
The Fed’s Goolsbee spoke at length this month about quirks in U.S. housing data that could distort the picture. Market-based rents have fallen from highs, but this has not yet been reflected in the CPI. This should have been the case, but the numbers remained stubbornly high. This is something that people will be watching very closely and I fear there will be a lot of pent-up demand for housing in the United States in the long term.
4) Healthcare
What makes the United States different from most developed countries? Private medical care. Note the components that were drivers of upside in the latest PCE Trimmed report from the Dallas Fed (annualized month-over-month changes):
- Net health insurance +15.5%
- Medical services +1.8%
- Financial services fees, commissions and charges +3.5%
- Non-profit hospital services to households +3.8%
- Public hospitals +3.8%
- Electricity +4.0%
- Maintenance and repair of motor vehicles +4.8%
- Other meals purchased +4.1%
- Dental services +5.3%
Often these numbers reset at the start of the year, so there could be something exceptional here that isn’t captured by seasonal adjustments, but they could also be a stubborn source of inflation which differentiates the United States from other countries.
But eventually the situation will return to normal and we will once again find ourselves in an era of low inflation. For now, inflation fears are proving to be opportunities to address this theme, but with these factors, it will take some time for U.S. inflation to converge toward the rest of the world. U.S. fiscal spending will remain high through 2025, but will then slow, perhaps significantly depending on the U.S. election results.
In the meantime, we may still be in the middle of a US dollar bull market. As divergence persists and other central banks cut rates, the dollar has considerable room to outperform.
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