Media outlets are reporting that the headline PCE deflator rose to above the Fed’s target for the first time in five years. Technically that is true, but the advance on the month was just 0.13% (false precision), the 12 month rate was boosted by a base effect, and the average inflation rate expansion-to-date is still just 1.5%. I am not suggesting the Fed needs to make up for bygones: agnostic on wisdom of that and realize they won’t try. I am just saying that the misses have been heavily to the downside.
The core PCE deflator was up 0.19%, which was slightly ahead of JPM’s estimate, which I am inclined to trust, and which this month was 0.15%. But that miss was due almost entirely to non-market prices which cannot be modeled with the price detail from the PPI and CPI. The market price only component of the core was up 0.16%. So going forward, I will continue to stick with Vick. Not perfect, but the best I see.
Hopefully, at some point soon we will get actually to test my view that the Fed is aiming for – and not just tolerating the risk of – above 2% inflation in the late cycle. * We are near full employment, the inflation forecast is for higher and their hair is hardly on fire, to put it gently. So thus far it fits, but we have not had a proper test. In fairness, we will never get a controlled experiment on this, but will see results that will seem to fit pretty well or not fit pretty well.
To date, there remains not much to say here. The inflation backdrop implies the Fed will want to guide trend demand growth back down to potential within the next – say – year or so. But there is no case for a squeeze. I guess this is consensus.
* I think they would want to do that not to make up for bygones, but purely because they would forecast inflation being lower in the coming recession and early recovery than in the late cycle. And at some point they have to be above-target to be at target on average. That point, I think, would be the late cycle.