December 2018 CPI Inflation

Mostly moving sideways. I thought there was a chance that inflation would really step down this month, which would be bearish. Of course, if the Fed is trying to be a counterweight, then there is the bad-news-is-good-news phenomenon, but here I think bad news would call for a pullback in the target interest rate, and the best we can hope for is for the Fed to hold the target rate steady for a while. (This is sort of a strange phenomenon. Before the past couple of decades, it was unusual for the Fed Funds Rate to have a plateau like it did in 2000 and 2006-2007. But, that seems to have become normal now.) So, the bad news is still bad news, and it seems as though it is just a matter of waiting for the Fed to get too far behind a falling natural rate.

Maybe there is some chance that the natural rate can chug its way back above the target rate again and the slow recovery can continue. The yield curve inverted pretty deeply earlier this month. It has leveled out quite a bit since then, but it is still inverted. So, I think this is like 2006 or 2000, where the inversion will bounce around a little bit but not go away until rates start to decline. In 2006 and 2007, homeowners with housing bubble capital gains could tap home equity lines or sell their homes to create some monetary breathing space. That isn't the case today, so my hunch is that the time between the initial inversion and the eventual fall will be shorter - more like 2000. But, I haven't been particularly accurate in my predictions of timing so far.

Last January had a noisy spike in non-shelter core inflation, so even though the non-shelter core is at 1.5% this month, it is more likely that after this month it will notch down to about 1.2%. The last quarter has been running at closer to 2%, but without that January spike, the YOY rate has been around 1.2% so if inflation is to build from here, that is where it would be building from.

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