The inflation “excitement”

With headline PCE ticking at 2% and the core version, free from the “wireless base effects”, clocking 1.9%, it was expected that the FOMC Statement would reflect those advances. Quite the opposite happened, with the Statement “playing them down”:

Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term.

The chart shows that for the past 63 months, headline PCE reached 2% (or above) on only three occasions. All are associated with a rise/spike in the price of oil.

The next chart indicates that headline PCE inflation is an “oil phenomenon”.

Although headline PCE is the target, the Fed should be guided by the core measure, much less volatile, having remained below 2%.

In other words, the only thing really moving the PCE up is oil. The real problem is keeping the inflation measure near 2%. After all, despite the contribution from oil prices in March, and the rolling off of the transitory base effects, the headline PCE barely made it to the 2% level.

What would keep it there is actual nominal growth, a condition that is just not possible given the Fed´s bias, as the chart indicates.

Just as in 2014, there is talk of “overheating”. Spending growth in 2018, however, is worse than in 2014, and even much of 2015. Just as going forward from 2014, we are more likely to face negative surprises on the spending front going forward from 2018. And in 2014-15, oil prices were coming down!

It is “shocking” to see that this expansion is soon to become the longest in history! Since there was no recovery, it will in fact soon become the “longest depression”. The charts compare real output in the “Great Depression” and now. Then the Fed also made mistakes, which were costly, but at least the economy was recovering!


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