The Return of Lowflation

Written by Richard Hokenson 

Since 1992, our view has always been that inflation will surprise to the downside as a consequence of an ageing planet. That is not to say that there have not been cyclical upticks but the secular path is for very low rates of inflation to prevail, i.e. the persistence of lowflation. The April CPI “surprised” to the downside with a substantial easing recorded by the core CPI, both with and without shelter (see Chart 1).


The percent change from the same month in the prior year for the core CPI ex shelter nearly reached the recent previous lows that occurred in 2015 and 2004. The deceleration in the core CPI ex shelter accounted for nearly all of the reduction in the core CPI as there was only a very slight easing in the CPI for shelter (see Charts 2 and 3).


With apartment rents having stopped increasing (see Chart 4), we expect the shelter component of the CPI to add to the lowflation already apparent in the core CPI ex food and energy. Additional easing in inflation will affect how the Fed views the need for further increases in the federal funds rate.


This update was researched and written by Richard Hokenson, as of May 18 2017