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11 11 2015 | by Victor Xing | Economics
Will low inflation delay Federal Reserve’s “liftoff?”
The Federal Reserve’s top concern, as expressed during the 2015 Jackson Hole Economic Symposium, is inflation. This was appropriately reflected in the title of the symposium – “Inflation Dynamics and Monetary Policy.” Inflation dynamic can be complex. Investors, economists and policymakers often quote the low inflation:
- June 2015: 0.318% MoM or 0.185% YoY
- Sept 2015: -.153% MoM or -0.025% YoY
Nevertheless, core CPI (CPI ex-energy and food) has been on an uptrend. Rent inflation (owner equivalent rent) has been going strong:
- June 2015 Core CPI: 0.179% MoM, 1.769% YoY, June 2015 OER: 0.365% MoM, 2.951% YoY
- Sept 2015 Core CPI: 0.211% MoM, 1.894% YoY, Sept 2015 OER: 0.300% MoM, 3.088% YoY
Much of the softness in headline inflation has been due to energy – please see green line below for WTI crude prices and its correlation with headline inflation
Moreover, worse than expected economic growth in China had exerted downward pressure on commodity prices, which transmits into lower manufactured goods prices, and reflects in apparel and consumer goods prices (green line below). These factors have contributed to the low inflation cited by many observers.
On the contrary, core services – prices we pay for haircut, rent, medical services, recreation, school tuition, mobile phone bills, etc, have been holding steady. This is why the FED has been very concerned about China’s economic strength – it can worsen goods price inflation to a point to have pass-through effects on core services inflation.
Therefore, if FED officials take a view that the energy crash has bottomed, and Chinese economy will not experience further deterioration, then the “transient” softness in inflation shall give way to higher inflation in the future.
Assuming both aforementioned assumptions hold true, the current low inflation (headline inflation) will not prevent an expected rate hike in December 2015.
Next article11 11 2015 | by Victor Xing | Capital Markets