Inflation backdrop remains blah, just like the cycle

Economists at JP Morgan, who seem to be good at this, estimate the price detail in the PPI and CPI reports map to a 0.15% rise of the core PCE deflator during February.

That would take the 3-month inflation rate up to near the top of the range that has held for this expansion, because of the strong gain in January and a base effect from four months ago.  But the 12-month inflation rate would actually tick down marginally.

During this expansion, core inflation has run at an average annual rate of just over 1 ½% and headline inflation (not shown) has run at exactly 1 ½%.  This is shown in the left panel of the chart below, the point of which is NOT to imply that the Fed has to make up for a past undershoot, but just to demonstrate that this undershoot has happened.

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I would be fine with the Fed correcting for past errors, as that would help lift inflation expectations. But that is not their plan – and I am not confident that their plan is suboptimal. Smart people really disagree over that one.

I would venture that capping inflation at 2% in the late cycle would not be a good idea, as that would prevent the Fed hitting 2% on average over the cycle looking purely forward. So I would guess the Fed plans to allow (intention not just toleration of risk) core inflation to peak slightly over 2%.

The tougher question is what rates path is consistent with that mid-term objective.  I am not confident the futures market is yet too hawkish about that path. But I would say that the Fed is not quite yet at the point where they are in a panic to get growth itself back to potential. Instead, their plan is probably to deliver a bit more tightening of the labor market, roughly in line with what I set out in my earlier post simulating the Blanchflower-Levin measure of labor market tightness.

Incidentally, here is my proxy of that approach updated to the Friday labor market data.  Assuming non-farm jobs growth of about 200k a month, incorporating the CBO’s estimates of the natural participation and unemployment rates, and neutralish-assumptions elsewhere, we look to be about 10 or 11 months (false precision) from the underemployment gap disappearing.

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There is some real crazy shit happening in politics and policy. I am not sure how bullish the collapse of the constitution and the suspension of the rule of law are when combined with talking about infrastructure.  People seem to think it is great. Jamie Dimon, also of JPM, assures us that Trump will govern different from how he campaigned, which is a huge relief and reassurance.

But the position of this business cycle itself looks kind of meh to me.  We are late-ish cycle but with no identifiable economic imbalances to make recession seem imminent. Boring.  Sorry. The president is utterly unhinged, but that is separate and not a good timing insight.