60 seconds on US growth and inflation in 2017

The world economy has entered 2017 with quite a bit of momentum. Most business surveys are quite strong, and global growth has picked up fairly substantially over the past year or so.

This is encouraging, but we’re also seeing inflation pick up. Consumer prices are rising at just over 2% in most economies, and will probably increase a bit further. This is particularly true here in the UK, where the falling pound means inflation will probably top 3% later this year.

It’s this rise in inflation that may slow down the recovery in US activity. Rising inflation will cut into real wage growth, and that will slow down consumer spending. So while we think growth is good at the moment, we think it will slow down later on. The only way that will change is if we see wages begin to accelerate.

If wages accelerated, it would mean that consumers could shrug off the increase in inflation and keep spending. So far, we don’t see much sign of that. We think wages are likely to remain quite subdued.

Our outlook is for US growth to be quite good in the near term, slow down a bit further out, and for inflation to eventually subside.