However much those pressing the Fed might wish otherwise, inflation still shows no signs of hitting the central bank’s 2 percent target.
December CPI (consumer price inflation) came in at 2.7 percent, slightly higher than expectations, with housing, groceries, and higher energy costs doing their bit to keep the number up. The data was still affected by distortions created by the shutdown. The better news is that the overall picture does not suggest any acceleration of inflation. The effect of tariffs has been less than expected, but that may partly reflect the herky-jerky nature of their implementation, and a willingness (so far) by companies to “eat” their costs. Core CPI (excluding food and energy) came in a little lower. Overall, the picture is one in which inflation is neither reaccelerating nor falling.
Then again, Bloomberg’s John Authers reports that:
Alternative measures for core inflation, including the trimmed mean (after excluding outliers), the median, the “sticky-price” rate of the goods whose price is hardest to cut, and the Fed’s “supercore” rate of services inflation excluding shelter all suggest that inflation is gently rising, and at or above the Fed’s 3% upper target. . . .
Authers also reports on the idea that certain policies are pushing inflation in opposite directions:
With net immigration approaching zero this year amid a supply glut of apartments, that should mean higher vacancy rates and lower rents. But that same trend will also raise inflationary pressures in sectors that depend on migrant labor, such as restaurants, hospitality and leisure.
Let’s see on both counts. The former would be good news, and my guess is that the latter may be less than expected on the back of productivity improvements.
Meanwhile new wholesale inflation data (PPI) is stuck at an annual 3 percent, probably supporting the thesis that companies are absorbing tariff costs (again, for now).
For his part, economist Robin Brooks, who has been following the evolution of the “debasement” trade, sees growing evidence of a Trump premium (presumably reflecting increased inflation fears) at the long end of the yield curve:
His note contains various charts, but it’s worth in particular checking out the one that showed this:
Expectations of further Fed easing are pulling down the 2-year yield, which is also pulling down 10-year. But when you take out this “front-end” effect, the 10y10y forward yield [the implied rate for a new loan taken out ten years ahead] has risen steadily since Trump came into office and is near its highest level over the past 20 years.
While there are expectations of further rate cuts, additional easing is not thought to be imminent and, in my view, it shouldn’t be. Another reason to hold off on cuts is the importance of the Fed making its independence clear. Failure to do that will likely mean higher rates sooner rather than later.
At the time of writing, silver is up around 5 percent today (currently a little over $91), gold is roughly flat ($4,617).