This morning’s update to the GDP report from last quarter showed that the Fed’s preferred inflation gauge, the core PCE deflator, rose at an annual rate of only 1.2 percent in 2016Q4. Seasoned economists know that the technical term for such an increase is bupkis.
Now, OTE’ers know that I’m always going on about boosting the signal to noise ratio by looking at year-over-year changes instead of annualized quarterly ones. That holds here as well, as seen in the figure below: the yr/yr change cuts a smooth average through the noisier annualized quarterly change.
Still, the deceleration in the noisier series could signal a slight slowing in an already low-pressure inflation environment. FWIW, a pure ARIMA forecast has the yr/yr change slowing from 1.7 percent to 1.5 percent over the next four quarters.
Anyway, GDP’s on trend at about 2 percent, the job market is closing in, but not yet at, full employment (the underemployment rate is still about a percentage point too high), and wage growth has picked up a bit but it’s not bleeding into price growth in anything like an obvious or threatening way. And inflation remains below the Fed’s 2 percent target and could even be slowing.
I’m pretty guilty when it comes to the usual economist’s hedge of “on the one hand this, on the other hand, that” but let me say unequivocally that the evidence in favor of a Fed rate hike in March looks really very, very weak.