The Fed’s True Love: He Tapers Me, He Tapers Me Not

The unemployment rate has seduced the FOMC for the third time. Fool me once…

Therefore, it will not likely be of much comfort for policymakers that “transitory” past “inflation” (which will mean it wasn’t inflation) continues to be evident in actual data.

The PCE Deflator for July 2021 is rendered stale by the CPI’s release two weeks before it. Either way, the FOMC prefers the former and it is, like the CPI, already coming around more than around the edges. The year-over-year change elevated to 4.17% for the overall bucket, but the monthly change (seasonally-adjusted) has softened for the third straight month.

Same for the core PCE Deflator, up 3.62% in July 2021 compared to July 2020, but “only” 0.34% when compared to June 2021. The short-run rate of change has clearly downshifted, pointing to a past peak in that same month of April we keep running across in inflation as well as market data around the world.

On top of the growing evidence for “transitory”, the Dallas Fed’s trimmed mean PCE Deflator strikes another factor from 2021 “inflation” – consumer price data has been driven by a suspiciously narrow set of prices (autos and gasoline). Actual inflation, to be actual inflation, is broad-based and sustained for a prolonged period.

All of this means the Fed seems to have gotten this year’s “inflation” right for the right reasons but is now committing to the same errors when interpreting the unemployment rate-setting them up – and all those blindly following the romance – to immediately squander their first victory in forever.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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