Inflation Won’t Cause The Fed To Hike Rates

Inflation Estimates Fall

Inflation estimates for 2019 were much higher 6 months ago than they are now. Economists see the writing on the wall. Inflation won’t be a problem in 2019, and the Fed definitely won’t raise rates. Economists didn’t see the slowdown coming and they thought rising nominal wage growth would generate inflation. 

Phillips curve is broken as wage growth has been strong without inflation. Fed doesn’t need to hike rates and workers are seeing real wage gains.

It is a Goldilocks economy for workers. Personally, I’m confused by how shelter CPI increased from 3.2% to 3.4% even though house prices have been increasing at a much slower rate recently. Ignore shelter CPI when doing your analysis of the housing market. I think price growth coming down and real wage going up have been enough to improve the housing market this spring. MBA purchase index’s yearly growth rate has increased for 4 straight weeks.  

The chart below shows JP Morgan’s probability distribution calculation of core PCE inflation using various government and non-government sources. As you can see, most guesses are for core PCE inflation to be between 1.5% and 2% for the June 2019 meeting. 

Inflation - Fed won’t hike rates with core inflation below its target and the economy in a slowdown

Even if the consumer is in solid shape. The distribution of estimates gets wider as we go out further in the future. About one-quarter of respondents think core PCE will be less than 1.5% from September 2019 to March 2020.

(Click on image to enlarge)

February PCE report will come out on March 29th. That’s after the March 20th Fed meeting, so that report won’t impact guidance. The Fed definitely has enough data to decide to not hike rates in March, to state hikes will remain on hold for as long as the data stays weak, and to end QT in the next few months. 

Interestingly, personal income growth in January was boosted sharply by Social Security and Medicare. Social Security and Medicare outlays were up 6.7% and 9.1% year over year. They accounted for 17% of the growth in gross personal income and 10% of gross personal income.

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