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Trump Tax-Cut Stimulus May Cause Inflation to Roar

Trump Tax-Cut Stimulus May Cause Inflation to Roar

Monday, 04 December 2017 08:34 AM Current | Bio | Archive

The passage of the U.S. tax bill through the Senate with “a sprinkling of concessions” means that the process now moves on to reconciliation of the House version of the bill.

There are suggestions from President Donald Trump that the corporation tax could go to 22 percent, not 20 percent.

The passage of the tax bill makes a difference to the equity market.

The immediate impact on the economy is not quite so clear.

The United States is operating at full employment and there is little suggestion of spare capacity in the economy.

In such an environment, the risk is that immediate stimulus might translate into inflation rather than to real economic growth.

However, the immediate stimulus effect to whatever emerges from the reconciliation process is also likely to be limited.

Markets are likely to focus more on the implications of the tax bill rather than on the frantic activity on the Trump twitter feed over the weekend.

The developments in the Russian affair are of interest, but with the balance of power perhaps tilting in favor of Congress rather than to the White House for the moment, the policy consequences are possibly less significant than they might have been.

In the wider economy, politics like this has relatively little impact.

The data calendar is relatively quiet today.

UK Prime Minister May heads to Brussels for lunch with one of the assorted Presidents that the European Union (EU) has.

This lunch matters because it has been built as the final offer before the heads of governments summit next week.

Media reports suggest that detail deals were struck over the weekend on some of the more contentious outstanding issues with the Irish border issue still in need of a solution.

It is also worth bearing in mind that the European Parliament has a say in any final deal and the European Parliament has not necessarily been inclined to compromise.

From the U.S. we get durable goods orders, which are unlikely to distract markets’ events in Washington.

From the European Union we got producer price inflation for the Eurozone, which is a little more significant.

This is a better reflection of corporate pricing power than is consumer price inflation.

There are some cost pressures building in some parts of the Euro area. However, inflation like this is unlikely to run away in the near term.

Producer prices (ex-construction) rose a slightly sharper than expected 0.4 percent on the month in October.

The core Eurozone PPI has now risen for three successive months, suggesting that underlying pipeline inflation pressures are beginning to build. Even so, prices are still only 1.2 percent above their level at the start of 2017 so any meaningful impact on CPI inflation may not be seen for some time.

The bias of market forces is perhaps towards higher rather than lower inflation in 2018.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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In such an environment, the risk is that immediate stimulus might translate into inflation rather than to real economic growth.
trump, tax, stimulus, inflation
Monday, 04 December 2017 08:34 AM
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