The Fed and Fading Inflation

Written by Richard Hokenson 

Fed chair Janet Yellen finally confirmed what we have discussed several times before – a rate of core price inflation that not only fails to reach the Fed’s target but is in fact retreating will result in at least a reassessment of their desire to continue tightening. It may even result in an extended pause.

Compared to its most recent year-on-year “peak” of 2.3% in January, the rate of core CPI inflation has eased for five months in a row, reaching 1.7% as of June, its lowest rate since 2015 (see Chart 1). Excluding shelter (42.4% of the core CPI), the inflation rate remains at 0.6% (see Chart 2).

Our reason for analysing Core CPI ex Shelter is that by far the biggest component of Shelter (see Chart 3) is owner’s equivalent rent which is an implicit not explicit measure of the cost of owner-occupied housing (see Chart 4). Continued deceleration in these indexes will make it even more difficult for core inflation to reach the Fed’s target.

The “weakness” in inflation, core or otherwise, is a global phenomenon. It reflects the ageing of planet earth, a global deceleration in the rate of growth of demand. At the same time, there is ample global supply. Our view has been and remains that price inflation will surprise to the downside. It is not coincidental that the European Central Bank and the Bank of Japan are also failing in reaching their inflation targets. The Fed is not the only central bank that does not really comprehend the impact of the global demographic changes that have occurred.


This update was researched and written by Richard Hokenson, as of July 20 2017