Inflation, United States

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Inflation, both overall and core, remains under control (Figure A1.5). Since the US Federal Reserve plans to link interest rate changes to the state of the labor market and the inflation rate, an accommodative monetary policy is likely to continue. Credit from commercial banks grew steadily in 2012. The 3-month moving average of credit from commercial banks rose by 5.4% in January 2013 over a year earlier. Higher credit growth denotes increased lending by commercial banks. To avoid the fiscal cliff on 1 January 2013, US authorities reached agreement on some revenue enhancements. However, the deal only delayed the implementation of automatic spending cuts by 2 months. Because lawmakers were unable to reach consensus on a compromise deficit-reduction package, across-the-board spending cuts through so-called sequestration took effect on 1 March 2013. The temporary reduction in employee Social Security contributions, from 6.2% of earnings to 4.1%, was allowed to expire on 1 January 2013 as scheduled. With continued uncertainty in the economy, the mix of tax increases and spending cuts will likely slow output and suppress consumer demand, and hence growth, in the short term. The Congressional Budget Office estimated in February 2013 that the combined impact of the fiscal policy changes would be a 1.5 percentage point reduction in US growth in 2013 (Box A1.1). The cut in public demand will need to be balanced by continued private sector strength to avoid a slip back into recession. The positive signs in investment, consumption, housing, employment, and credit point in the direction of a gradually strengthening economy. The US should grow by 2.0% in 2013, slightly slower than in 2012. Assuming that the fiscal drag phases out but that monetary policy continues to be supportive, output in the US is expected to pick up gradually and the economy to expand by 2.6% in 2014. Source: CEIC Data Company (accessed 8 March 2013).
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