US Service-Sector Expansion Fuels Inflation Concerns
Steady Expansion with Faster Price Increases
US service-sector businesses have seen a return to steady expansion in the third quarter, following a brief slowdown in the second quarter. However, this expansion is accompanied by faster price increases, which pose a threat to the central bank’s disinflation plan. As a result, interest rates are expected to remain higher for a longer period. This is likely to dampen interest-sensitive expenditure and lead to slower growth in oil consumption in 2024.
Persistent Inflation Despite Rate Hikes
Inflationary pressures have persisted despite the fall in oil, gas, and other raw material prices, as well as the central bank’s increase in overnight interest rates. Real rates have only recently turned positive, and they are still barely higher than most measures of inflation. Although the increase in borrowing costs has only affected a minority of households and businesses so far, the longer interest rates remain high, the greater the impact on overall borrowing costs.
Impact on Borrowers and Overall Economy
Higher-for-longer interest rates will particularly impact marginal borrowers in the United States, Europe, and emerging markets. The full impact of the interest-rate increases experienced so far will continue to filter through the economy, affecting interest-sensitive spending in 2024. Most rate traders anticipate that the central bank will keep overnight rates higher for longer to combat persistent inflation.
Renewed Expansion and Oil Consumption
The renewed expansion of the US manufacturing and service sectors is currently supporting oil consumption and prices. However, in the medium term, the higher-for-longer interest rates needed to bring inflation back to target are likely to depress business activity and slow oil consumption growth in 2024.
Conclusion
The US service-sector expansion and the resulting inflationary pressures pose challenges to the central bank’s disinflation plan. With interest rates expected to remain higher for longer, the impact on borrowers and overall borrowing costs is a concern. While the current expansion is supporting oil consumption, the medium-term outlook suggests slower growth due to the higher-for-longer interest rates. It remains to be seen how the central bank will navigate these challenges and manage inflationary pressures in the coming years.
