The recent bout of disinflation likely occurred from both improvements in supply and decreases in demand, but both effects are fading away. Supply improvements are largely over, and the Fed’s anticipated pivot may rekindle demand both domestically and abroad. In addition to raising asset prices and lowering interest rates, the anticipated Fed pivot has also eased global financial conditions by weakening the dollar. A weaker dollar is globally stimulative because it improves the balance sheets of foreign corporations borrowing in dollars and foreign banks that lend dollars. More directly, a weaker dollar is also usually directly associated with a rise in global commodity prices. Both of these effects place upward pressure on inflation. Inflation data may look very benign in the near term, but a return to a steady 2% inflation regime seems unlikely.
- Date Posted:
- January 2, 2024
“Excess” cash was not particularly important for many Americans. That means that the liquidation of that cash probably did not play (much) of a role in financing consumer spending over the past two years. And that in turn probably means that consumer spending will not suddenly slow down now that the “excess” cash balances outside of the top 1% have mostly disappeared. For better or worse, wage income has been the main driver of aggregate consumer spending throughout this period. Relatively low levels of debt—including among those who have relatively less cash on hand—means that many Americans have a lot of latent financial firepower to increase their spending above and beyond their income, should they wish to do so. That may not be attractive now, but lower interest rates could potentially change things. Zooming out, it is worth noting that the liquidation of household cash balances has coincided with surging investment in U.S. Treasury securities (potentially hedge fund activity, but that is a subject for another note) alongside slower borrowing and sustained purchases of other assets, both real and financial.