Price Index and the U.S. Economy
When the Fed hiked the base interest rate for only the second time in a decade during December, this served as a celebration of the progress that the U.S. economy had made since the beginning of 2016. After initially increasing the rate to 0.5% during December 2015, chairperson of the Fed Janet Yellen announced an incremental lift to 0.75% at the end of last year.
While the Fed may have refrained from implementing a further hike at the beginning of February, experts believe that it is not a matter of time before the base rate is increased to 1.0%. The recent price index data certainly reaffirms this opinion, as the U.S. economy continues to showcase robust performance and sentiment in the face of going uncertainty.
What the Price Index Data Means for the U.S. Economy in 2017
In precise terms, U.S. consumer prices were found to have increased at their fastest pace for nearly four years in January, rising by 0.6% since the end of 2016. This represented the largest monthly increase since February 2013, while it also doubled the initial predictions that had been made by national economists.
This sizable and unexpected increase was largely attributed to a 7.8% hike in gasoline prices, while the cost of food and energy also rose incrementally during the month.
If we delve beyond the initial price hike, however, we also see that core consumer inflation rose by 0.3% during January. This is one of the primary, macroeconomic metrics measured by the Fed, and it is interesting to note that this figures has also increased by a total of 2.3% during the last 12 months. This is running in excess of the government’s annual target of 2%, creating a scenario where the cost of living may soon outstrip earnings and consumer confidence will fall as a result.
The Bottom Line:
The Impact of Trumponomics and the Likelihood of Further Interest Rate Increases
We must also consider the impact of so-called Trumponomics, which refer to the economic policies of new U.S. President Donald Trump. While there remains a great deal of uncertainty about Trump’s core economic policy (other than his desire to relax financial market regulations), he is thought to favour a slightly weaker dollar than we have seen in recent months. This kind of devaluation may cause inflation to rise further, as the cost of imports increase incrementally over time.
According to currency experts FxPro, the dollar has already weakened recently amid a flurry of controversial executive orders that have been signed by the new President. This short-term contract is likely to become a sustained devaluation if the President does favor a weaker currency, however, while his focus on promoting products manufactured in the U.S. will also impact on the price and competitiveness of imports into the States. Over the course of 2017, this could have a noticeable impact on the American economy and its thriving consumer base.
This will only exacerbate further interest rate hikes, as the Fed looks to manipulate the macroeconomic climate and maintain a balance between growth and consumer confidence. So after a spell of consolidation where the base rate increased only twice in 10 whole years, we may well see a scenario unfold in 2017 where there are two more hikes in a single year. The rate will almost certainly increase to 1.0% during the next two quarters, however, particularly if inflation continues to outstrip the Fed’s annual target.