Shrinking market imbalances will help cut US inflation

Significance

An embedded wage-price spiral took hold in the late 1970s; the price of breaking it was almost a decade of high unemployment. Today's situation more closely resembles 1946-48, when supply disruption and excess demand caused high inflation. Crucially, wage expectations currently remain low.

Impacts

• US employment remains strong so far despite the interest rate hikes and a weakening housing market, but it is likely to weaken modestly.
• Persistent shortages of labour in retail services and hospitality will continue to push up prices in restaurants and accommodation.
• Fiscal policy has subtracted from GDP growth since second-quarter 2021; dampening demand, this is set to continue for another two years.