The ECB: So Much Flexibility And So Little To Do

The ECB meeting is the most important calendar event in the week ahead. It is true that the US is to report February CPI figures, but the base effect surge begins with the March reading. Still, headline inflation will likely be lifted by rising food and energy prices. The core rate has been flat for the past two months, and a small rise should not be surprising.

Last March, headline CPI fell by 0.3%. In April, it tumbled 0.7% and another 0.1% in May. These will drop out of the year-over-year rate and most likely be replaced with positive numbers, probably around 0.2% or 0.3%. This will make the year-over-year rate appear to surge. 

This is not the kind of inflation that is of much concern to policymakers or businesses. The February PMI and manufacturing surveys are signaling rising prices. Fed officials seem to recognize this, but on the whole, the price pressures are not unexpected, undesirable, or dangerous.

They are partly a reflection of the economy re-opening, some bottlenecks, and low inventories. Officials have argued that they do not expect these price pressures to be very strong or persistent. Businesses can be expected to respond relatively quickly to supply issues and low inventories. This type of price pressure is seen as short-lived. 

The pressures coming from the demand side are also not expected to be sustained. Fiscal stimulus will run its course. The stimulus checks will have been absorbed in household finances, and in late Q3, some income support measures, like the extension of emergency jobless benefits, will end. More broadly, the herd immunity, achieved through the virus and vaccine, will likely mean that fiscal stimulus will be dramatically reduced.

The next debate after the infrastructure initiative may be about the "fiscal cliffs." We had argued in favor of linking some stimulus efforts to economic conditions, like maintaining emergency jobless benefits until the unemployment rate is below a certain threshold to minimize the disruption. Still, it did not make it into the legislation.

There does seem to be a rising chorus of people, for whom the highly-respected journalist John Authers may have channeled for when he recently wrote the "epochal shifts [in inflation] can be difficult to spot in real-time, but the signs are there." While journalists and some market participants may see this shift as clear as the nose on my face, central bankers mostly disagree. The BOE's Haldane may be a lone exception, warning that central banks may be complacent about inflation.

Fed officials are not buying it is primarily due to the slack in the labor market. Nearly a year after the pandemic first stuck, the number of people filing for jobless claims for the first time is above what had been the record peak during the Great Financial Crisis. The March jobs report was nearly twice as strong as expected, and the vast majority of the 465 thousand private sector jobs were in leisure and hospitality.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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