The Return of Low Inflation

Written by Richard Hokenson 

Our demographically inspired enthusiasm for a Fed-friendly investment environment is twofold. The first was that there is more slack in the labor markets than currently perceived which means that wage inflation remains moderate. This was an issue discussed at length in last week’s report, an issue that will be revisited when BLS releases the results for the Employment Cost Index for the first quarter on April 28. The second positive item that we expected was that inflation would surprise to the downside, reinforcing the secular disinflationary environment that has been our basic thesis for 25 years. This was confirmed by the most recent reading on CPI inflation. Excluding owners’ equivalent rent, the year-ago percent change receded to slightly less than 1% (see Chart 1). This was enough to cause the core CPI to ease to 2% year on year. Considering that most observers including the Fed were anticipating a further firming of inflation, this unexpected development should at least give pause to the anticipated pace of monetary restraint.

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