On Wednesday last week CPI (consumer price index) data came out higher than expected, and the markets assumed inflation was on its way to winning a gold medal. Treasuries slumped and investors pushed up the odds for multiple Federal Reserve interest rate increases in 2018 and beyond. This CPI inflation report was eagerly anticipated following robust wage data earlier this month that sent treasury yields higher and started a rout in equities, pushing the main indexes into the first correction in two years. Even worse, the CPI data suggested consumer spending was slower.
Like the Olympics, the direction and speed of inflation see their share of hype and drama. But at the end of the competition, if you want to be on the podium you need to throw down back-to-back 1440s and then finish big. Core CPI only increased 0.3% following a 0.2% gain in December, and the year-on-year rate of change was steady at 1.8%. This will just not get you on the podium in Pyeonchang!
When we look for a medal winner in inflation the trick we are looking to see is a meaningful and sustained increase in the PCE (personal consumption expenditures), which is the main inflation measure used by the Federal Reserve. It has been a long time since this measure was above 2%, and the chart does not tell a compelling story likely to soon end with inflation on the podium.
It’s hard to win a medal. It takes years of training, good coaches and more than a little luck and timing. Is inflation going to win one someday? The effort is certainly there. Slack in the economy is evaporating, unemployment is at cyclical lows, economic growth is likely above trend and the federal deficit is poised to go above 5% in 2019, which can stoke higher rates as the treasury looks to borrow over a trillion dollars. But luck may not be on the side of inflation, as worker productivity and wages remain stuck, and demographics and high debt levels are not supportive. Work, luck and timing.
Well, there is always another Winter Olympics in four years!
Sources: Bloomberg, The Financial Times, The Bureau of Labor Statistics