Our outlook for US inflation and growth has brightened considerably since the start of 2018, so we have lifted our targets for both US Treasury yields and TIPS-based breakeven inflation rates. Here, we review the factors we see as contributing to the rise in US inflation and look at the potential monetary policy response from the Federal Reserve (Fed).
Certain transitory factors should be supportive for year-on-year (YoY) consumer price inflation (CPI) over the next few months. The collapse in US cell-phone plan prices in March 2017 as providers switched to infinite data plans will fall out of the 12-month equation this April, driving year-on-year core and headline inflation back up. Also, the US dollar’s recent depreciation and the strength of commodity and energy prices are likely to have some pass-through effects. Indeed, our forecasts indicate that base effects may drive headline inflation to 2.8% YoY by July.
