This current cycle of expansion in the US economy will become the longest on record next month. Friday’s retail sales report suggests there is plenty of fuel left in the tank.
The soft CPI data released on Wednesday indicate that the real figures will show an even greater improvement in consumer spending since the dip of late-2018.
The New York Fed’s measure of median one-year ahead inflation expectations has tumbled this year, but longer-term measures of expected price changes are also softening. This downward shift in inflation expectations cannot be attributed solely to oil.
The US consumer has become accustomed to positive disruption from technology and cost-cutting from intense competition, which are keeping a lid on prices.
An absence of inflation pressures has been the defining characteristic of this economic cycle so far. It is important to emphasise: this is not necessarily a negative, if the economy is subject to constant positive supply shocks. The outperformance of software companies in the S&P 500 underlines the point: investors are backing companies that are inherently disinflationary. This trend provides an important clue for the weak inflation numbers.