U.S. economy is warming up, but unlikely to overheat: Moody’s

U.S. inflation appears to be surging, but the trend is likely temporary, says Moody’s Investors Service in a new report.

The rating agency noted that recent U.S. inflation readings have been elevated, which is feeding into concerns about fast-rising prices.

“Market worries surrounding high and accelerating inflation stem from the risk that pent-up demand, strong fiscal stimulus and the Fed’s commitment to keep policy rates on hold will cause overheating,” Moody’s said.

Yet, the rating agency noted that the Fed has signalled it isn’t yet concerned about the threat of accelerating inflation.

“Indeed, the Fed has communicated that it will look through transitory inflation and let inflation exceed 2% until its goal of 2% average inflation over the long run is met,” the report said.

During a recovery, volatile inflation readings are to be expected, Moody’s noted. The rating agency’s baseline scenario is that these current signs of inflation are due to transitory drivers.

“We believe that different inflation measures will be volatile and overshoot the average this year, because of temporary one-off factors,” the report said.

Those factors include base effects from last year’s price drops, recent rising energy prices, the effect of higher input costs feeding into final goods prices and supply bottlenecks amid surging demand.

However, Moody’s expects these effects will eventually ease.

“Steep increases in commodity prices are not uncommon after disruptive global recessions, but such surges tend to be short-lived. Eventually supply increases in response to higher prices and demand growth subsides,” Moody’s said. “Continued growth in input costs at the current pace is very unlikely.”

As the economy’s reopening continues, inflation pressures will shift from goods to services, Moody’s said — but this, too, is expected to be temporary.

“Since services make up a significant share in the average household’s consumption basket, inflation will remain high. This dynamic reflects an adjustment from the demand-supply dislocation, rather than overheating,” Moody’s said.

“Inflation will decelerate after pent-up demand dissipates.”

As for the risk of wage inflation, Moody’s said “labor shortages in sectors that are opening up could lift wages in specific sectors, but it is too early to conclude that wage growth and inflation will permanently rise.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.