A Beautiful Picture of Low Inflation – Rising Growth

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Core and headline inflation remain subdued with the Fed’s preferred measure of inflation, Core PCE, remaining slightly below target.

U. S. economic data continue to roll strong. Non-farm payrolls at 223k outperformed expectations, with the two-month net revisions moved up by 15k, manufacturing outperforming, and upwardly revised to boot. The Chicago Purchasing Manager report hit 62.7, turning up from the Q1 swoon. The ISM report was chock full of good news: employment rose, manufacturing rose and new orders rose, were above 60 and above the 12-month moving average. Price movements remain moderate. Yes, ISM Prices Paid ticked higher and are closing in on 80, but that is likely a response to rising oil prices that have come off the boil and are down 10% from the late-May highs. More systemic measures are quiescent: The April PCE deflator was up 2% YoY while core was up 1.8% (with March revised down by 0.1%). Average hourly earnings remain the “dog which isn’t barking” at 2.7% YoY in May, but that’s barely above the 2.5% CPI inflation rate and has to be twinned with the 1.2% YoY increase in productivity.

This is a beautiful picture of low inflation/rising growth – unless you are wedded to Phillips Curve type analysis, an indicator which continues to be revived – despite a lack of ability to predict inflation ex ante. Nevertheless here we are, with the better data leading to a revival of a December Fed Funds hike. While I continue to believe that the inflation data will not provide the Fed enough cover to hike I also believe that pricing a hike fully into the market (now about 45%) won’t be enough to derail the U.S. or global economy on its own. Probably the pricing-in of a December hike has likely done most of its damage to the USD, which could unwind as the Italians stand down a bit from creating a Pan-European mess. Please check out page 60 of the Global Perspectives book for more on inflation - consumer price index.

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