“Inflation wish”

Given how many are worried about “lowflation”, whenever a new data point is released you are likely to get absurd (and misleading) comments such as in the two examples below.

“U.S. consumer prices rose in December, bolstering expectations that long-weak inflation is set to gain strength in the new year.”

“For now, this report adds more weight to the idea that the run of soft numbers from March through July was ‘transitory”.

To cap it “brilliantly”, this from Justin Lahart at the WSJ:

Janet Yellen can take a victory lap about inflation on her way out as Federal Reserve chairwoman. She has been saying the weakness in last year’s inflation readings was transitory, and she was right.

That clears the way for the Fed to raise rates at least the three times it expects to this year. That would surprise investors who have been skeptical of inflation and higher rates.

The truth is that while headline CPI YoY ended 2017 almost exactly as it ended 2016 (2.11% vs 2.10%), core CPI inflation was a bit lower at the end of 2017 (1.76% vs 2.22%).

The chart shows that for the past seven years, core CPI inflation has been remarkably tame and stable. Meanwhile, headline CPI inflation has “danced” in tune to oil prices. For the big bump in oil observed in January and February of 2017 to be repeated in the short run, oil must climb to more than USD 90/barrel (50% increase from present level). Is that likely?

And even if it does, while headline will climb towards 3%, core inflation will remain subdued. We must hope that if oil shoots up, the Fed doesn´t fall into the trap.


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