December 04, 2024 [UBS] – The release of the October broad measure of consumer prices in the United States, the PCE deflator, showed inflation that was unsurprising and broadly stable. The numbers are distorted by fantasy housing price measures, but measuring prices that actually exist in the real economy are rising less than 2% y/y.

 The price data is not especially alarming. However, a note of caution is struck in the detail. Currently, supply issues are more important than demand issues in driving inflation.

The San Francisco Federal Reserve breaks down price data into supply and demand driven price changes. Essentially, if prices and consumption both rise in an unexpected manner, demand is likely to be driving inflation. If prices rise, but consumption falls in an unexpected manner, supply constraints are likely to be driving inflation. Since June last year, supply constraints have been more important than strong demand in pushing up prices.

That today’s inflation is driven more by supply than demand is relevant as the US enters 2025. Several possible US policy measures have supply chain implications—notably the threatened tax on consumers of imports (including companies using imports in their supply chains), and large-scale deportations of workers. The extent of future supply chain disruption will assume greater importance for future inflation.

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