MNI INTERVIEW: US 2025 Inflation Likely Higher-Ex-Fed's Koenig
MNI (WASHINGTON) - U.S. inflation is likely to drift further from the Fed's 2% target in 2025 as nominal growth measures show no sign of budging from elevated levels, while higher deficits and slowing immigration under President-elect Donald Trump won't help, former Dallas Fed senior policy adviser Evan Koenig told MNI.
Nominal GDP growth accelerated to a 5.2% annual rate over the second and third quarters, after cruising at 5.0% over the past four quarters. The latest jobs report also showed total wage payments to workers rising at a 5.2% annual rate over the six months through November, compared with 5.1% growth over the most recent 12 months.
"It's at least questionable that current policy and policy expectations are restrictive when nominal income and spending growth rates remain high and show no sign of slowing," said Koenig, who spent over three decades at the Dallas Fed.
"Five-plus-percent growth in nominal spending or nominal income is consistent with 2% inflation only if you believe potential real GDP is increasing at a 3-plus-percent annual rate, which just isn't credible. Inflation is more likely to rise over the coming year than to fall, if current trends continue." (See: MNI INTERVIEW: Higher Trend Growth Means More Fed Cuts - S&P)
NO LANDING
Excess nominal GDP growth has so far failed to translate into 3% inflation only because of strong labor-supply growth, Koenig said.
Immigration surged under President Joe Biden and the prime age labor force participation rate soared to a high of 84% earlier this year, a full point higher than just before the Covid-19 pandemic. Trump last week reiterated he intends to follow through on promises to deport millions of people in the country illegally and prioritize border security.
"Regardless of the election outcome, labor-supply growth was bound to slow," adding to upward inflationary pressures, Koenig said.
Some analysts have argued fast-rising productivity allows for higher growth without inflation, but Koenig said it's difficult to separate temporary growth increases from increases in trend, especially in the wake of the pandemic.
"The increase in trend productivity growth would have to be implausibly large – 1 percentage point – to make 5% nominal demand growth consistent with 2% inflation."