The Daily Update - Muted Inflation Speaks Volumes

US core inflation data came in today up just 0.1% month-on-month, further relieving any fears of immediate runaway inflation; the year-on-year core figure came in at 2.1% (0.1% below expectations and the previous month’s reading) while real average hourly earnings were up 1.9% yoy. For all those lucky accountants the category with the highest inflation was “tax preparation” where data showed a price surge of 13.8%. Still, the broader impact on the average household purse may be larger than the figure suggests as food prices were up sharply and gas prices rose for the first time in four months.

Inflation concerns have been muted compared to last year since the Fed’s “patient” pivot. Capital Economics note that “With headline CPI inflation edging down to 2.5-year low of 1.5% in Feb from 1.6% and core inflation dropping to 4-month low of 2.1%, from 2.2%, Fed appears to be justified in being patient and leaving interest rates on hold for extended period.” Indeed, many would now agree that the Fed are firmly on the side-lines with implied probabilities now showing a 30% chance of rates being cut by January 2020 versus 70% chance rates remain on hold. This is compared to a 38% implied probability of a hike in 2019 taken from less than 3 months ago (from 19th December figures just after the Fed’s last hike).

Although falling energy costs (particularly following the American shale and natural gas boom) have played a key part to the household economic boost in recent years, the core figure remains more important to the Fed’s process of economic forecasting. Also, more stable measures of inflation like the core PCE data (out at the end of the month) are heavily relied upon by the Fed as well as ongoing dialogue with business leaders. For now all of these points to the current benign inflation environment persisting with Fed Chair Powell’s words remaining relevant, “With nothing in the outlook demanding an immediate policy response and particularly given muted inflation pressures, the committee has adopted a patient, wait-and-see approach.’’ And while the Fed sits on its hands, both bonds and equities continue to perform.

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