Written by By David Olive, CNN
Move over, stagflation. The US economy is now teetering on the brink of inflation . Although the problems have been brewing for some time, it’s not yet clear how much price increases will seep into the everyday lives of American consumers.
The good news for those inclined to be savers is that the US Federal Reserve has shown its resolve to stick with its course of raising interest rates. However, recent inflation readings suggest that the economy may be in better shape than previously thought.
Let’s start with the bad news first. Inflation, or the prices of goods and services as measured by the US Consumer Price Index (CPI), ticked up 0.4% in September. The core measure, which excludes more volatile food and energy prices, rose 0.2%. The increases did not push the so-called core CPI past 2%.
Data analysis from the United States Federal Reserve Bank of St. Louis notes that core inflation has not been above 2% since December 2014. Food and energy prices held the index down between 2012 and 2014, but they have largely recovered in the past two years.
Why is inflation tickling up?
One reason that inflation could be edging higher is the disruption to global oil supply caused by the ongoing conflict in Syria. Although US crude inventories are still above the five-year average, the number is up from six weeks ago. That signals that the global market is in better shape to weather supply disruptions.
Higher energy prices also coincide with a sharp increase in the cost of wood products and construction materials.
Until now, higher tariffs on aluminum and steel imports seemed to have little impact on the US economy. In fact, growth has been so strong that consumers have been able to put some of their extra income toward the cost of their own goods.
Fed raises interest rates
This is a roundabout way of saying that higher tariffs and tariffs from other countries may be a contributor to higher prices for goods and services.
In August, trade tensions started heating up as President Donald Trump and his allies announced a package of tariffs on imports from China. When tariffs on Chinese goods were enacted this year, they already included a list of $50 billion worth of goods, including cell phones, industrial equipment and food.
What effect could this have on consumer prices? For the time being, we’ll just have to sit tight.
China and the US agreed last week to a 90-day cease-fire in their trade war, during which the two countries are supposed to try to find a way to work together. After that, tariffs will take effect again on January 1.
Zoeb Meldrum, executive director of the Econometrics Research Group at the University of Nevada, said that Trump’s reliance on tariffs could constrain the US economy in the long term.
“I think he may be the most ideologically motivated president since FDR. … And he has done quite a bit of unilateral and autocratic-style economic policy, particularly with China and the imposition of tariffs,” Meldrum said.
The US economy grew by a robust 4.2% in the second quarter of this year. July was the best month for housing since 2006, with a 6.6% increase over July 2017.
However, purchasing managers reports at the end of last month indicated that factory production growth had slowed and that growth in the manufacturing sector may have weakened.
The Econometrics Research Group expects an average annual growth rate of 2.9% from now through 2020, which would be slightly lower than the average of 3.1% over the past 15 years.