Waiting For The Inflation Canary To Sing… Or Not

The Federal Reserve reports that it expects faster economic growth and higher inflation – two factors that historically have triggered tighter monetary policy. But the Fed is playing a different game this time and announced on Wednesday that it will keep interest rates near zero. Depending on your macro outlook, this is either hopelessly naïve or a clear-eyed view of looking through what some anticipate will be reflationary noise for the next several months.

In time, perhaps as early as the second half of the year, the inflation numbers will determine if Fed Chair Powell and company are prescient or reckless. Here’s a short list for monitoring the incoming data.

Core Inflation

The first order of business is keeping an eye on core inflation measures. Consumer price data is among the earliest hard-data series published each month and so this is an obvious place to focus. Why core? Because it offers a more reliable measure of the trend. The short-term headline inflation metrics can and do deviate sharply, up and down, from core readings, but history strongly suggests that focusing on core numbers helps minimize noise and boost signal. On that front, two data sets deserve close attention: annual changes to the core Consumer Price Index and the Sticky Price Consumer Price Index less Food and Energy – two efforts to capture a robust measure of the inflationary trend. In both cases at the moment, this pair continues to reflect modest inflation pressure that’s running below an annual 2% pace through March — well below the Fed’s 2% target. Inflation is expected to pick up in the months ahead, but the question is whether we’ll see more than a temporary bounce due to base effects brewing? If these core readings move close to 3% and stay there (or run higher), the case will significantly strengthen for worrying that the Fed has let the inflation cat out of the bag.

Treasury Market Expectations

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Disclosures: None.

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