June 12, 2018

CPI Report: No surprises

It came exactly as expected, with core CPI clocking 2.2%, so no significant asset price moves. The chart below compares core CPI and core PCE. These inflation gauges have been well behaved over the past several years. Note there is a 40 basis point gap between the CPI and PCE, implying that the May 2018 core PCE will remain below the 2% target. In fact, two or three years ago, inflation, by any gauge, was more ‘calamitous’ than now. Why, then, is the Fed so concerned about ‘overheating’? Maybe because it feels below 4% unemployment is harmful!  


The Fed´s ‘model’ is screwed up

In Powell’s Fed Could Clear Up a Few Mysteries Puzzling Investors, we read: The Fed says unemployment is already running below the level that can be sustained in the longer run, but wages are crawling higher rather than taking off. What’s more, job growth hasn’t slowed down as much as you might expect in an economy with a big worker shortage. Fortunately, inflation is not a wage phenomenon. On the contrary, it is inflation that drives up wages. The late 1960s makes that clear. Note that wage growth only picks up after inflation has almost tripled! Comparing the late 1990s… Read More


When ‘good’ is ‘terrible’

The headline: The Fed’s Biggest Dilemma: Is the Booming Job Market a Problem? Snipets: No question looms larger for Federal Reserve Chairman Jerome Powell than this: How low can the U.S. unemployment rate safely go? Only twice in the past half-century has unemployment fallen to its current rate of 3.8%—for a few years in the late 1960s and for one month in 2000. The ’60s episode spurred years of soaring inflation that would take a decade for policy makers to corral. The latter coincided with a technology bubble that, when it burst, caused the 2001 recession. It seems low unemployment… Read More