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Solid Growth and Squishy Inflation

​Recent data has been supportive of our 2017 views on macro and monetary policy: solid growth, squishy inflation and a Fed delayed but not denied.

MIG expects US GDP growth to remain solid in 2017 - at or slightly above its 2.1% trend rate. Job growth should be sufficient to keep the “twin engines” of consumer spending and housing humming along. Last week’s jobs report and today’s retail spending data support our view. Furthermore, new sectors of the economy - manufacturing and mining - are poised to contribute to economic growth this year. Of course there is also the prospect of fiscal policy supporting growth in the latter half of the year.

However, inflation will be “squishy” in 2017. Core inflation will have a hard time rising in the early part of the year. Appreciation in the dollar has already renewed deflationary impulses from abroad. This week’s third consecutive decline in ex-fuel import prices supports this view.

As for the Fed, we expect them to fall short of their own forecast of three rate hikes this year. Sluggish inflation early in the year should keep the Fed on the sidelines through June. This will limit the number of rate hikes to no more than two in 2017.