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202 matches for " core cpi":
The downside surprise in the November core CPI, which rose by 0.1%, a tenth less than expected, was due entirely to an unexpected 1.3% drop in apparel prices. This alone subtracted 0.05% from the core, but we think the chance of a reversal in December is quite high.
The run of soft core CPI numbers is over. The average 0.18% increase over the past two months probably is a good indication of the underlying trend -- the prints would have been close to this pace in both months had it not been for wild swings in the lodging component -- and the other one-time oddities of recent months' have faded.
Monthly core CPI prints of 0.3% are unusual; June's was the first since January 2018, so it requires investigation.
Our base case is that the core CPI rose 0.2% in December, but the net risk probably is to the upside. We see scope for significant increases in sectors as diverse as used autos, apparel, healthcare, and rent, but nothing is guaranteed.
The consensus forecast for the October core CPI, which will be reported today, is 0.2%. Take the over. Nothing is certain in these data, but the risk of a 0.3% print is much higher than the chance of 0.1%.
It's pretty easy to dismiss back-to-back 0.3% increases in the core CPI, especially when they follow a run of much smaller gains.
We'd be surprised to see a repeat today of August's very modest 0.08% increase in the core CPI.
The September core CPI was held down by prescription drug prices, which fell by 0.6%, and vehicle prices, which fell by 0.4%.
After three straight 0.3% increases in the core CPI, we are in agreement with the consensus view that September's report, due today, will revert to the 0.2% trend.
After five straight undershoots to consensus, with the core CPI averaging monthly gains of just 0.05%, investors are asking hard questions about the Fed's belief -- and ours -- that core inflation is headed towards 2% in the not-too-distant future.
Our base case forecast for today's July core CPI is that the remarkable and unexpected run of weak numbers, shown in our first chart, is set to come to an end, with a reversion to the prior 0.2% trend.
The January core CPI numbers are consistent with our view that the U.S. faces bigger upside inflation risks than markets and the Fed believe.
Now that the run of unfavorable base effects in the core CPI--triggered by five straight soft numbers last year--is over, we're expecting little change in the year- over-year rate through the remainder of this year.
The average month-to-month increase in the core CPI in the past three months is a solid 0.20, much firmer than the 0.05% average over the previous five months, stretching back to the first of the run of downside surprises, in March.
We see clear upside risk to the inflation data due before the FOMC announcement, from three main sources.
The overshoot in the November core PPI does not change the key story, which is that PPI inflation, headline and core, is set to fall sharply through the first half of next year, at least.
The near-term U.S. inflation outlook is benign, but it is not without risk.
Last week's final barrage of data showed that EZ headline inflation rose slightly last month, by 0.1 percentage points to 1.5%, driven mainly by increases in the unprocessed food energy components.
Currency markets often make a mockery of consensus forecasts, and this year has been no exception. Monetary policy divergence between the U.S. and the Eurozone has widened this year; the spread between the Fed funds rate and the ECB's refi rate rose to a 10-year high after the Fed's last hike.
Friday's CPI data in the euro area confirmed our expectation that inflation jumped last month.
Inflation pressures in the Eurozone edged lower last month.
A modest dip in gasoline prices will hold down the October CPI, due today, but investors' attention will be on the core, after five undershoots to consensus in the past six months.
Today brings a huge wave of data, but most market attention will be on the June CPI, following the run of unexpectedly soft core readings over the past three months.
Inflation data in Germany remain up in the air following recent revisions and restatements of the underlying indices.
Today's February CPI report is very unlikely to repeat January's surprise, when the core index was reported up 0.3%, a tenth more than expected.
For the past six years, the PCE measure of core inflation has undershot the CPI version. The average spread between the two year-over-year rates since January 2011 has been 0.3 percentage points, and as far as we can tell most observers expect it to be little changed for the foreseeable future.
The core CPI inflation rate rose in April to 2.1% from 2.0%, thanks to unfavorable rounding, despite the below consensus 0.14% month-to-month print.
The core CPI rose only 0.1% in May, marking the fourth straight soft reading.
A steep drop in prices for financial services in January was a key factor behind the sharp slowdown in the rate of increase of the core PCE deflator in the first quarter, relative to the core CPI.
We have argued recently that the year-over-year rates of core CPI and core PCE inflation could cross over the next year, with core PCE rising more quickly for the first time since 2010.
Housing rents account for some 41% of the core CPI and 18% of the core PCE, making them hugely important determinants of the core inflation rate.
The FOMC minutes confirmed that most FOMC members were not swayed by the weak-looking first quarter GDP numbers or the soft March core CPI. Both are considered likely to prove "transitory", and the underlying economic outlook is little changed from March.
The odds favor--just--an end to the three-month streak of solid 0.2% increases in the core CPI with the release of today's January report.
We continue to expect core CPI inflation to drift up further over the course of this year, partly because of adverse base effects running through November, but it's hard to expect a serious acceleration in the monthly run rate when the rate of increase of unit labor costs is so low.
Core CPI inflation has been 2.1-to-2.2% year-over- year for the past seven months, a remarkably stable run which likely will persist for a few more months.
All eyes today will be on the core PCE deflator for January, following the unexpectedly large 0.3% increase in the core CPI.
The undershoot in the April core CPI wasn't a huge surprise to us; the downside risk we set out in yesterday's Monitor duly materialized, with used car prices dropping by a hefty 1.6% month-to-month, subtracting 0.05% from the core index.
The undershoot in the September core CPI does not change our view that the trend in core inflation is rising, and is likely to surprise substantially to the upside over the next six-to-12 months.
The month-to-month core CPI numbers in March were consistent, in aggregate, with the underlying trend.
The spike in the May core CPI, and its likely echo in the core PCE, won't stop the Fed easing at the end of this month.
If the CPI measure of core consumer goods inflation were currently tracking the same measure in the PPI in the usual way, core CPI inflation would now be at 2.3%, rather than the 1.7% reported in November.
The third straight 0.3% increase in the core CPI-- that hasn't happened since 1995--was ignored by the Treasury market yesterday, which appeared to be focusing its attention on the ECB.
Core CPI inflation is heading for 2½% by the end of this year, and perhaps sooner. The trend in the monthly numbers is now a solid 0.2%, and that's before the weaker dollar arrests the decline in goods prices. Goods account for only a quarter of the core CPI, and right now they are the only part of the index under downward pressure. If--when--that changes, core inflation could rise quite rapidly.
Three separate stories will come together to generate today's September core CPI number. First, we wonder if the hurricanes will lift the core CPI.
July's fifth straight undershoot to consensus in the core CPI was very different the previous four. Only one component--lodging away from home--prevented the first 0.2% month-to-month print since February.
Since January 2015, Core CPI inflation has risen to 2.3% from 1.6%, propelled by a combination of accelerating rents, a substantial rebound in the rate of increase of healthcare costs, and a modest-- though unexpected--upturn in core goods prices. It's always risky, though, simply to extrapolate recent trends and assume you now have a clear guide to the future.
Core CPI inflation plunged in the aftermath of the crash, reaching a low of 0.6% in October 2010. It then rebounded to a peak of 2.3% in the spring of 2012, before subsiding to a range from 1.6-to-1.9%, held down by slow wage gains and the strengthening dollar, until late last year. Faster increases in services prices and rents lifted core inflation to 2.3% in February, matching the 2012 high, but it has since been unchanged, net.
The core CPI has now risen by 0.2% in each of the past five months, a streak last seen 11 years ago.
The average FICO credit score for successful mortgage applicants has risen in each of the past four months.
The media and markets are waking up to the idea that the housing market has peaked in the face of higher mortgage rates and slightly--so far--tighter lending standards.
It's going to be very hard for Fed Chair Powell's Jackson Hole speech today to satisfy markets, which now expect three further rate cuts by March next year.
This week brings home sales data for July, which we expect will be mixed. New home sales likely rose a bit, but we are pretty confident that existing home sales will be reported down, following four straight gains. We're still expecting a clear positive contribution to GDP growth from housing construction in the third quarter, but from the Fed's perspective the more immediate threat comes from the rate of increase of housing rents, rather than the pace of home sales.
In April last year, something odd happened in the FX market.
The Eurozone's current account surplus extended its decline in May, falling to a nine-month low of €22.4B, from €29.6B in April.
Argentina's inflation ended 2019 badly, and it is still too early to bet on a protracted downtrend, even after the renewed economic slowdown.
With Fed officials now in pre-FOMC meeting blackout mode, this week will not bring a repeat of Friday's confusion, when the New York Fed felt obligated to issue a clarification following president William's speech on monetary policy close to the zero bound.
Our forecast of significantly higher core inflation over the next year has been met, it would be fair to say, with a degree of skepticism.
Last week, the Atlanta Fed updated its median hourly earnings series with new October data, showing wage growth accelerating to an eight-year high of 3.9%. That's a full percentage point higher than the increase in this measure of wages in the year to October 2015, and it follows a spring and summer during which wage growth appeared to be topping-out at just under 3½%.
The FOMC's view of the economic outlook and the likely required policy response, set out in yesterday's statement and Chair Yellen's press conference, could not be clearer.
Fed Chair Yellen made it clear in last week's press conference that she is not convinced the increase in core inflation will persist: "I want to warn that there may be some transitory factors that are influencing [the rise in core inflation]... I see some of that is having to do with unusually high inflation readings in categories that tend to be quite volatile without very much significance for inflation over time.
The recent sell-off in Treasuries has not yet reached significant proportions.
It is looking increasingly likely that core inflation, which already has fallen to 2.1% in May, from a peak of 2.7% last year, will slip below 2% next year.
The data tell an increasingly convincing story that the Eurozone's external surplus rose further in the second half of last year.
Sentiment in the French business sector ended this year on a high. The headline manufacturing index fell slightly to 112 in December, from an upwardly-revised 113 in November, but the aggregate sentiment gauge edged higher to a new cycle high of 112.
The Fed's strategic view of the economy and policy has not changed since last December, when it first said that "The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.
The 20bp increase in 10-year yields over the past month doesn't live up to the hype; bondmageddon it was not.
China's money and credit data released last Friday reaffirm our impression that the tightening has gone too far.
We have not been expecting the Fed to raise rates next week, and yesterday's data made a hike even less likely. The September Philly Fed and Empire State surveys were alarmingly weak everywhere except the headline level, and the official August production data were grim.
Last week's import price data, showing prices excluding fuels and food fell in January for the fourth month, support our view that the goods component of the CPI is set to drop sharply this year.
The market-implied probability that the MPC will cut Bank Rate at its meeting on January 30 jumped to 63%, from 44%, following the release of December's consumer prices report.
We expect September's consumer prices report, released on Wednesday, to show that CPI inflation held steady at 1.7%, below the 1.8% consensus.
Markets' reaction last week to the ECB's October meeting accounts--see here--shows that investors are beginning to take seriously the idea of an inflection point in Eurozone monetary policy.
Treasury Secretary Mnuchin's five-line letter to House Speaker Pelosi on last Friday--copied to other Congressional leaders--which said that "there is a scenario in which we run out of cash in early September, before Congress reconvenes", introduces a new element of uncertainty to the debt ceiling story.
Consumption accounts for almost 70% of GDP, and retail sales account for about 45% of consumption.
The most eye-catching aspect of December's consumer prices report was the pick-up in core inflation to 1.9%, from 1.8% in November, above the no-change consensus.
The case for the MPC to hold back from implementing more stimulus was bolstered by September's consumer prices figures.
Following our note yesterday about upside risks to wage growth and the question of how the Fed will respond, given their sensitivity to labor cost-push inflation risk in the past, we want to address a question raised by readers.
One of the arguments we hear in favor of an endless Fed pause--in other words, the cyclical tightening is over--is that GDP growth is set to slow markedly this year, to only 2% or so.
Perhaps the single strongest U.S. economic data series in recent months has been construction spending, which has risen by more than 1%, month-to-month, in four of the past five months.
In the wake of last week's rate increase, the fed funds future puts the chance of another rise in September at just 16%. After hikes in December, March and June, we think the Fed is trying to tell us something about their intention to keep going; this is not 2015 or 2016, when the Fed happily accepted any excuse not to do what it had said it would do.
CPI inflation held steady at 1.5% in November, marking the fourth consecutive below-target print, though it was a tenth above both the MPC's forecast and the consensus.
The Eurozone inflation data have been relatively calm in the past six months. The headline rate has been stable at about 1.5%, and the core rate has fluctuated closely around 1%.
Data released yesterday confirmed that economic activity is improving in Brazil.
For the record, we think the Fed should raise rates in December, given the long lags in monetary policy and the clear strength in the economy, especially the labor market, evident in the pre-hurricane data.
In broad terms, the euro has followed the EZ economy in the past 12-to-18 months.
When Fed Chair Powell said last week that the "surprise" weakness in the official retail sales numbers is "inconsistent with a significant amount of other data", we're guessing that he had in mind a couple of reports which will be updated today.
Cast your mind forward to late October 2018. The Fed is preparing to meet next week. What will the economy look like? The key number is three.
Yesterday's advance CPI data in Germany suggest that inflation fell slightly in August.
The most important number, potentially, in today's wave of economic reports is the Employment Costs Index for second quarter.
Yesterday's advance inflation data in Germany fell short of forecasts--ours and the consensus--for a further increase. Inflation was unchanged at 0.8% year-over-year in November, but we think this pause will be temporary.
September PMI surveys in Mexico continued to bolster our argument for a subpar recovery in the second half of the year.
The weekly jobless claims numbers are due Thursday, as usual, but in the wake of a flood of emails from readers, all asking a variant of the same question-- should we be worried about the rise in continuing jobless claims?--we want to address the issue now.
Markets remain convinced that the U.S. faces no meaningful inflation risk for the foreseeable future.
The recovery in small business sentiment since the fourth quarter rollover has been extremely modest, so far.
Yesterday's advance data from Germany and Spain suggest that today's Eurozone inflation report will undershoot the consensus. In Germany, headline inflation slipped to 1.6% in March from 2.2% in February, and in Spain the headline rate plunged to 2.3% from 3.0%.
The build-up to today's ECB meeting has drowned in the focus on Italy's new political situation and the rising risk of a global trade war.
We've always said that China's first weapon, should the trade war escalate, is to do nothing and allow the RMB to depreciate.
Today's ECB meeting will follow the same script as in July. No-one expects the central bank to make any formal changes to its policy settings. The ECB will keep its main refinancing and deposit rates at zero and -0.4%, respectively.
Productivity growth reached the dizzy heights of 1.8% year-over-year in the second quarter, following a couple of hefty quarter-on-quarter increases, averaging 2.9%.
Inflation in the Eurozone tumbled last month, increasing the pressure on Mr. Draghi to deliver another dovish message when the central bank meets on Thursday.
The President's threat to impose tariffs on imported Chinese consumer goods on September 1 might yet come to nothing.
In the wake of April's 0.2% increase in real consumers' spending, and the upward revisions to the first quarter numbers, we now think that second quarter spending is on course to rise at an annualized rate of about 3.5%.
Yesterday's data kicked off the release of Eurozone Q3 growth numbers with a robust Spanish headline. Real GDP in Spain rose 0.8% quarter-on-quarter, slowing slightly from 0.9% in Q2, and le aving the year-over-year rate unchanged at 3.1%.
It's pretty easy to spin a story that the recent core PCE numbers represent a sharp and alarming turn south.
Data released on Friday show that the Chilean economy had a weak start to the second half of the year.
It seems reasonable to think that manufacturing should be doing better in the U.S. than other major economies.
We learned last week that the U.S. no longer has a coherent dollar policy.
In the last few weeks markets have been treated to the news that euro area industrial production crashed towards the end of Q4, warning that GDP growth failed to rebound at the end of 2018 from an already weak Q3.
Fed Chair Powell sounded a lot like Janet Yellen yesterday, at least in terms of substance.
The Fed wants price stability--currently defined as 2% inflation--and maximum sustainable employment.
As expected, the ECB made no changes to its policy stance today. The refi and deposit rates were left at 0.00% and -0.4%, respectively, and the pace of purchases under QE was maintained at €30B per month.
The core economic narrative in U.S. markets right now seems to run something like this: The pace of growth slowed in Q1, depressing the rate of payroll growth in the spring. As a result, the headline plunge in the unemployment rate is unlikely to persist and, even if it does, the wage pressures aren't a threat to the inflation outlook.
China's National People's Congress yesterday laid out its main goals for this year, on the first day of its annual meeting.
Small business sentiment and activity, as reported by the NFIB survey, has recovered exactly half the drop triggered by the rollover in stock prices in the fourth quarter. This matters, because most people work at small firms, which are responsible for the vast bulk of net job growth.
Data yesterday revealed that headline inflation in Germany was unchanged in March at 1.5%, thanks mainly to higher energy inflation, which offset a dip in food inflation.
A robust April payroll number today is a good bet, but a gain in line with the 275K ADP reading probably is out of reach.
Core PPI inflation has risen steadily this year, with month-to-month increases of 0.3% or more in five of the past six months.
Chile's inflation outlook remains benign, allowing policymakers to cut interest rates if the economic recovery falters.
Colombian inflation ended 2017 slightly above the central bank's 2-to-4% target range, after a year in which policymakers cut interest rates to boost economic growth.
The only way to read the December NFIB survey and not be alarmed is to look at the headline, which fell by less than expected, and ignore the details.
We want to revisit remarks from Fed Vice-Chair Clarida last week.
Today brings only the preliminary Michigan consumer sentiment data for January so we want to take some time to look at how recent changes to Medicare Part B premiums, which cover doctors' fees, are likely to affect inflation over the next few months.
Japan's CPI inflation was unchanged, at 0.2% in February.
The reported rebound in January retail sales was welcome, but the overshoot to consensus was matched, more or less, by the unexpected downward revisions to the December numbers.
The Easter effect depressed services inflation more than markets expected in April, but the main downside surprise was the tepid rebound in non-energy goods inflation.
Inflation appears no longer to be an issue for Mexican policymakers. The annual headline rate slowed to 3.0% year-over-year in February from 3.1% in January, in the middle of the central bank's target range, for the first time since May 2006.
We already know that the key labor market numbers in today's May NFIB survey are strong.
At least some investors clearly were expecting Fed Chair Powell yesterday to offer a degree of resistance to the idea that a rate cut at the end o f this month is a done deal.
October's consumer prices report, released on Wednesday, likely will show that CPI inflation has continued to drift further below the 2% target
If you had only the NFIB survey of small businesses as your guide to the state of the business sector, you'd be blissfully unaware that the economic commentariat right now is obsessed with the potential hit from the trade tariffs, actual and threatened.
We're very interested in the detail of today's January NFIB survey; the headline index, not so much.
It's hard to know what will stop the correction in the stock market, but we're pretty sure that robust economic data--growth, prices and/or wages--over the next few weeks would make things worse.
Today's consumer prices figures likely will show that CPI inflation increased to 3.1% in November, from 3.0% in October.
The E.U.'s decision to grant the U.K. a Brexit extension until October 31 does not extinguish the possibility that the MPC will raise Bank Rate before the end of the year.
Mexico's inflation rate ended 2018 in line with market expectations, strengthening the case for interest rates to remain on hold in the near term.
A plunge in apparel prices attracted most of the attention after the release of the March CPI report, but it was not, in our view, the most important number.
On the heels of yesterday's benign Q3 employment costs data--wages rebounded but benefit costs slowed, and a 2.9% year-over-year rate is unthreatening--today brings the first estimates of productivity growth and unit labor costs.
A quick rebound in growth, after the slowdown to a reported 2.6% in the fourth quarter, is unlikely.
Friday's inflation data in the Eurozone were a mixed bag.
The headline number in today's NFIB survey of small businesses probably will look soft. The index is sensitive to the swings in the stock market and we'd be surprised to see no response to the volatility of recent weeks. We also know already that the hiring intentions number dropped by four points, reversing December's gain, because the key labor market numbers are released in advance, the day before the official payroll report.
The continued modest rate of increase in unit labor costs makes it hard to worry much about the near-term outlook for core inflation.
For some time now, we have puzzled over the softness of small firms' capital spending intentions, as measured by the monthly NFIB survey.
The likely dip in the headline NFIB index of small business sentiment and activity today will tell us that business owners are unhappy and nervous about the potential impact of the latest China tariffs on their sales and profits.
We were right about the below-consensus inflation numbers for June, but wrong about the explanation. We thought the core would be constrained by a drop in used car prices, while apparel and medical costs would rebound after their July declines.
We'd be surprised to see any serious shift in the tone of Fed Chair Powell's semi-annual Monetary Policy Testimony today compared to the FOMC statement and press conference just three weeks ago.
Inflation pressures are gradually easing in Mexico, opening the door for rate cuts as early as next month. The June CPI report, released yesterday, showed that prices rose 0.1% month-to-month unadjusted in June, in line with market expectations.
The announcement, late Tuesday, that the administration plans to impose 10% tariffs on some $200B-worth of imports from China raises the prospect of a substantial hit to the CPI.
On the face of it, our forecast of higher core inflation by the end of this year is seriously challenged by the recent data.
Many economists describe the EZ as the sick man of the global economy, thanks to its incomplete monetary union, low productivity growth and a rapidly ageing population.
The EZ calendar has been extremely busy in the first few weeks of the year, making it virtually impossible to see the forest for the trees.
We have no real argument with the consensus forecasts for the January CPI, with the headline likely to rise by 0.3%, with the core up 0.2%.
The broad strokes of yesterday's ECB meeting were in line with markets' expectations. The central bank left its main refinancing and deposit rates unchanged, at 0.00% and -0.4% respectively, and maintained the same forward guidance.
The partial government shutdown is now the longest on record, with little chance of a near-term resolution.
A significant minority of investors were betting on a repeat of January's outsized 0.349% increase in the core, judging from the immediate market reaction to the release of the February CPI report.
Friday's data added further colour to the September CPI data for the Eurozone.
It's hard to know what to make of the October CPI data, which recorded hefty increases in healthcare costs and used car prices but a huge drop in hotel room rates, and big decline in apparel prices, and inexplicable weakness in rents.
The fall in CPI inflation to just 1.5% in October-- its lowest rate since November 2016--from 1.7% in September, isn't a game-changer for the monetary policy outlook.
Markets are caught in a trade loop.
In March, CPI rents--the weighted average of primary and owners' equivalents rents--rose by 0.35% month- to-month.
President Trump blinked again yesterday, delaying tariffs on some $150B-worth of Chinese consumer goods until December 15.
Next week is so crammed full of data releases that we need to preview November's consumer price data early, in the eye of the storm of the general election.
The imposition of 10% tariffs on $200B-worth of Chinese imports is not a serious threat either to U.S. economic growth--the tariffs amount to 0.1% of GDP--or inflation.
Our forecast for a 0.3% increase in the September core PPI, slightly above the underlying trend, is even more tentative than usual.
If the Phase One trade deal with China is completed, and is accompanied by a significant tariff roll-back, we'll revise up our growth forecasts, but we'll probably lower our near-term inflation forecasts, assuming that the tariff reductions are focused on consumer goods.
Our default position for core durable goods orders over the next few months is that they will fall, sharply.
Today's rate hike will be accompanied by a new round of Fed forecasts, which will have to reflect the faster growth and lower unemployment than expected back in September.
For more than two years, the BoJ has fretted, in the outlook for economic activity and prices, that "there are items for which prices are not particularly responsive to the output gap."
We suspect that today's ECB meeting will be a sideshow to the political chaos in the U.K., but that doesn't change the fact that the central bank's to-do list is long.
Thursday's CPI report in Mexico showed that inflation is edging lower. We are confident that it will continue to fall consistently during Q1, thanks chiefly to the subpar economic recovery, low inertia and the effect of the recent MXN rebound.
December's consumer prices report looks set to show that CPI inflation was stable at 1.5%--in line with the consensus--though the risks are skewed to the downside.
Jim Bullard, the St. Louis Fed president, said last week that Phillips Curve effects in the U.S. are "weak", and that nominal wage growth is not a good predictor of future inflation.
The April CPI report today will be watched even more closely than usual, after the surprise 0.12% month-to-month fall in the March core index. The biggest single driver of the dip was a record 7.0% plunge in cellphone service plan prices, reflecting Verizon's decision to offer an unlimited data option.
The sudden downshift in core inflation at the consumer level since March, clearly visible in the CPI and the PCE, and shown in our first chart, has been accompanied by a steady increase in core producer price inflation.
Today's producer price report for March likely will show a further increase in core goods inflation, which already has risen to 2.0% in February, from 0.2% in the same month last year. The acceleration in the U.S. PPI follows the even more dramatic surge in China's PPI for manufactured goods, which jumped to 6.6% year-over-year in February, from minus 4.9% a year ago. China's PPI is much more sensitive to commodity prices than the U.S. series, so there's very little chance that core U.S. PPI goods inflation will rise to anything like this rate.
If you gave us $100, we'd put $90 on inflation, headline and core, being higher a year from now than it is today. Our view, however, is not universally shared, and some commentators continue to argue that the U.S. faces deflation risks. Exhibit one for this view is our first chart, which shows a high correlation between the PPI for finished goods prices and the CPI inflation rate, ex-shelter.
Falling gas prices will make themselves felt in the November CPI data today, with a likely 4% seasonally adjusted decline enough to subtract 0.2% from the month-to-month change in the headline index. But gas prices plunged by 7.2% in November last year, so in year-over-year terms gas prices will push aggregate headline inflation up. We look for the rate to rise to 0.4%, up from 0.2% in October and zero in September. The same story will play out in January and February too, by which time the headline rate should have risen to 1¼%, assuming a crude oil price of about $35 per barrel.
Friday's inflation data in the Eurozone added a dovish twist to the story ahead of the key ECB meeting later this month.
After four straight sub-consensus core CPI readings, we think the odds now favor reversion to the prior trend, 0.2%, over the next few months.
The year-over-year rate of core CPI inflation rose steadily from a low of 1.6% in January 2015 to 2.3% in February this year. At that point, the three-month annualized rate had reached a startling 3.0%. You could be forgiven, therefore, for thinking that the dip in core inflation back to 2.2% in March was an inevitable correction after a period of unsustainably rapid gains, and that the underlying trend in core inflation isn't really heading towards 3%.
Core CPI inflation was little changed last year, after rising in 2015. The year-over-year rate stood at 2.1% in November, unchanged from December 2015. We look for a trivial nudge up to 2.2% in today's December report, but our first chart makes it clear that the trend no longer is clearly rising. The key reason that progress has been slower than we expected is that the rate of increase of prices for core non-rent services has slowed since the middle of last year, as our second chart shows.
The strong dollar is pushing down goods prices, but not very quickly. As a result, the sustained upward pressure on rents is gradually nudging core CPI inflation higher. It now stands at 1.9%, up from a low of 1.6% in January, and even relatively modest gains over the third quarter will push the rate above 2% by year-end. We can't rule out core CPI inflation ending the year at a startling 2.3%.
The upturn in core CPI inflation this year has passed by almost unnoticed in the markets and media. In the year to September, the core CPI rose 1.9%, up from a low of 1.6% in January. But that's still a very low rate, and with core PCE inflation unchanged at only 1.3% over the same period, it's easy to see why investors have remained relaxed. In our view, though, things are about to change, because a combination of very adverse base effects and gradually increasing momentum in the monthly numbers, is set to lift both core inflation measures substantially over the next few months.
In yesterday's Monitor, we argued that if the upside risk in an array of core CPI components crystallised in January, the month-to-month gain would print at 0.3%, for the first time since August. That's exactly what happened, though we couldn't justify it as our base forecast. A combination of rebounding airline fares, apparel prices, new vehicle prices, and education costs conspired to generate a 0.31% gain, lifting the year-over-year rate back to the 2.3% cycle high, first reached in February last year.
Mexico is the only major LatAm economy not struggling with inflation. The headline April CPI fell 0.3% month-to-month, with the year-over-year rate unchanged at 3.1%, in the middle o f Banxico's 2-to-4% target. Inflationary pressures have been broadly absent since the beginning of the year, with the annual core CPI rate slowing to 2.3% in April from 2.5% in March.
In recent years we have argued consistently that investors and the commentariat overstate the importance of the dollar as a driver of U.S. inflation. Only about 15% of the core CPI is meaningfully affected by shifts in the value of the dollar, because the index is dominated by domestic non-tradable services.
The failure of the core CPI to mean-revert in April, after the unexpected March drop, does not mean that the Fed can relax.
If the rate of increase of the core CPI in the second half of the year matches the 0.19% average gains in the first half, the year-over-year rate will rise to 2.3% by December. In December last year, core inflation stood at just 1.6%, following a run of soft second half numbers. We can't rule out a slowdown in the monthly increases in the second half of this year too, given the evidence suggesting a small bias in the seasonal adjustments.
Having panicked at the January hourly earnings numbers, markets now seem to have decided that higher inflation might not be such a bad thing after all, and stocks rallied after both Wednesday's core CPI overshoot and yesterday's repeat performance in the PPI.
The closer we look at the data, the more convinced we become that the rollover in CPI physicians' services prices, which has subtracted nearly 0.1% from core CPI inflation since January, is a response to sharply higher Medicare part B premiums, especially for new enrollees.
After four straight above-trend increases in the core CPI, you could be forgiven for thinking that something is afoot. It's still too soon, though to rush to judgment. The data show three previous streaks of 0.2%-or-bigger over four-month periods since the crash of 2008, and none of them were sustained.
The solid 0.2% increase in January's core CPI, coupled with the small upward revision to December, ought to offer a degree of comfort to anyone worried about European-style deflation pressures in the U.S.
The MPC looks set to raise Bank Rate to 0.75% on Thursday, from 0.50%, despite below-trend GDP growth in the first half of this year and rapidly falling core CPI inflation.
The 0.18% increase in the core PCE deflator in December was at the lower end of the range implied by the core CPI. It left the year-over-year rate at just 1.5%.
Under normal circumstances, the 0.23% increase in the core CPI, reported earlier this month, would be enough to ensure a 0.2% print in today's core PCE deflator.
All eyes will be on the core PCE deflator data today, in the wake of the upside surprise in the January core CPI, reported last week. The numbers do not move perfectly together each month, but a 0.2% increase in the core deflator is a solid bet, with an outside chance of an outsized 0.3% jump.
It's probably too soon to start looking for second round effects from the drop in gasoline prices in the core CPI. History suggests quite strongly that sharp declines in energy prices feed into the core by depressing the costs of production, distribution and service delivery, but the lags are quite long, a year or more.
Chair Yellen remains as committed as ever to the idea that the tightening labor market will eventually push up inflation, but the unexpectedly weak core CPI readings for the past four months have complicated the picture in the near-term.
When FOMC members sit down to begin their two-day meeting on September 16, the August CPI numbers will have just been released. We expect the data will show core inflation at 2.0% or a bit higher, up from a low this year of just 1.6%. Shorter-term measures of inflation will, we think, be 2¼-to-½%. These numbers are not outlandish; they just require the monthly gains in the core CPI to match June's pace, which was in line with the average for the previous six months.
The rate of increase of the financial services and insurance component of the PCE deflator has slowed from a recent peak of 5.8% in May 2014 to 3.3% in June this year. This matters, because it accounts for 8.4% of the core deflator, a much bigger weight than in the core CPI.
Two fiscal deadlines are on the near-horizon.
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