Opinion | US inflation is set to rise. The Fed must act now
- Stephen Roach says trade war’s impact on global value chains and the tight US labour market will fan inflationary pressures of the current US economic upturn
- The Fed is right to press on with monetary tightening – perhaps even at a pace faster than the market expects
It was inevitable. Another upturn in the US inflation cycle is at hand. Since the “Great Disinflation” of the early 1980s, when the annual increase in the consumer price index plunged from 14.7 per cent in March 1980 to 2.4 per cent in July 1983, inflation has generally remained in a relatively narrow 1-5 per cent range for a quarter of a century.
When the economy softened, inflation slid to the lower end of that range, and when it strengthened, it moved to the upper end. Such is the case today.
The global risk to US inflation reflects not only a cyclical upturn in the world economy, but also mounting trade frictions that pose serious threats to the stability of global value, or supply, chains.
Watch: US-China trade war – day 105 and counting
As global value chains have grown in importance over time, so has the internationalisation of inflation. In economic terms, that means broadening the assessment of inflation risks from a focus on domestic “output gaps” – the difference between actual and potential (or full employment) gross domestic product – to the global output gap.