Could inflation fall back below target?
Fed has 3 criteria when it comes to hiking rates;
1, inflation to reach 2% and stay there for a year
2, overshoot conditions regarding the 2%
3, max employment and labor market recoveryFirst point is ticked off, second is kind of maybe while the third has still not been ticked off.Let's turn to the infamous inflation. BofA writes;"The challenge with declaring victory on the inflation overshoot is that we are vulnerable to inflation falling back below the target – at least temporarily – next year."They focus on the used cars, trucks, rental cars and new vehicles group. This is some 5% of the core PCE and contributed to approx 40bp of the 1.2pp gain in core PCE over past months. If this subgroup would have been unchanged, core PCE would have been 2.9% yoy in April and 3%yoy in May.The simulation of "stress testing" prices to full reversion to pre Covid levels, 50% and 25% would result in core PCE of 1.3%, 1.6% and 1.8%.Go figure how stats work...but given the CPI numbers out earlier today and the surge in the vehicles component, we would expect Fed to stay in the transitory camp.
1, inflation to reach 2% and stay there for a year
2, overshoot conditions regarding the 2%
3, max employment and labor market recoveryFirst point is ticked off, second is kind of maybe while the third has still not been ticked off.Let's turn to the infamous inflation. BofA writes;"The challenge with declaring victory on the inflation overshoot is that we are vulnerable to inflation falling back below the target – at least temporarily – next year."They focus on the used cars, trucks, rental cars and new vehicles group. This is some 5% of the core PCE and contributed to approx 40bp of the 1.2pp gain in core PCE over past months. If this subgroup would have been unchanged, core PCE would have been 2.9% yoy in April and 3%yoy in May.The simulation of "stress testing" prices to full reversion to pre Covid levels, 50% and 25% would result in core PCE of 1.3%, 1.6% and 1.8%.Go figure how stats work...but given the CPI numbers out earlier today and the surge in the vehicles component, we would expect Fed to stay in the transitory camp.
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