Investments  

Wage growth to trigger rise in US inflation

Inflation in the US looks set to pick up as wage growth and an increase in rents begin to lift prices higher.

The developed world has been gripped in the fear of deflation so far in 2014 as the rate of inflation has fallen in the US, UK and Europe.

But experts have suggested that although the global outlook appears to be disinflationary, the rate of inflation in the US looks set to trend upwards from current levels.

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Michael Stanes, investment director at discretionary manager Heartwood Investment Management, said: “Looking at the US in isolation, in our view there is evidence of inflationary pressures emerging that suggest over the medium term the direction of travel for US inflation is higher, not lower, from current levels.”

Ana Gil, investment specialist at M&G Investments, said “disinflation within the goods sector” had “tamed” US inflation in the past two years but suggested there were signs this trend was reversing.

She pointed to residential rents and healthcare costs as two of the key sectors that could lead to a rise in the rate of US inflation.

Residential rents account for approximately 40 per cent of core US consumer price inflation (CPI), meaning the sector has a huge impact on the rate of inflation.

Ms Gil pointed out that vacancy rates in housing had been declining significantly and now stood at 7.5 per cent, which she said was the “lowest level on record”.

She said with such a low level of vacancies, it is likely “the rental market is quickly tightening and the costs of renting will inevitably rise over the next 12-18 months ”.

“Housing rents could rise at 4 per cent to 4.5 per cent over the next 12 months,” she said.

“And since rents account for roughly 40 per cent of the core CPI, higher rents could push the annual inflation rate up significantly.”

The cost of healthcare accounts for roughly 20 per cent of the “personal consumption expenditure index”, which is closely followed by the US Federal Reserve as a key measure of spending and inflation.

And Ms Gil said the stronger jobs market in the US was likely to lead to more inflation in medical costs as more employees demand healthcare.

“Over time, the increased demand for healthcare against a relatively constant supply should put upward pressure on medical prices,” she said.

“So far, the biggest drag on inflation has been the downward pressure on goods prices coming from overseas.

“However, given service-sector inflation has three times the weight of goods inflation in core CPI, it would take an unusually large decline in the latter to prevent inflation from trending higher from here.”

Mr Stanes said he did not subscribe to the view that “the US economy was at risk of falling into a deflationary trap” and that “while a weak oil price keeps the debate around deflation going, inflation risks further out are to the upside”.