Inflation?! We ain’t got no stinkin’ inflation!

February 28th, 2017 at 11:12 am

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.

Source: BEA

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.

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6 comments in reply to "Inflation?! We ain’t got no stinkin’ inflation!"

  1. rjs says:

    January PCE will be out tomorrow…core could be over +0.3%, maybe near 4% on an annual basis

  2. Blissex says:

    «the usual economist’s hedge of “on the one hand this, on the other hand, that”»

    It is more usually “on the one hand, this, on the other hand, that, on the third hand, another”. 🙂

  3. Measure for Measure says:

    We have had 2 deflation scares since 2000. That is too many.

    To avoid this, the Fed could raise its inflation target level to 3%, and its comfort zone to 2.5-3.5%. There would be no need to panic if inflation moved out of that comfort zone, merely a need to adjust policy accordingly. Core PCE exceeded 4% in the early 1990s after all, when nobody complained about inflation. It just wasn’t an issue.

    Alternatively, the Fed could adopt nominal level GDP targeting. But to maintain the same policy framework in the face of persistent economic weakness and dangerously low inflation is highly irresponsible.

  4. jorgensen says:

    Trumps ongoing efforts to deport ten million residents is going to push down GDP materially. The housing market will be hit particularly hard since those people all live somewhere. There does not appear to be any case for an interest rate increase.

  5. Ray Lopez says:

    Interesting, but given the evidence that money is largely neutral, irrelevant.