Sorting the Inflation Signals

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Special Guest Blogger: Tim Kearney

The nonfarm payroll (NFP) print of 20,000 jobs raised some concerns about the economy, but the balance of key recent data points to a continued low inflation/good growth situation in the United States. February CPI was up 1.5% YoY while Core CPI rose 2.1%. Each was 0.1% lower than expected. Headline inflation had hit 2.9% YoY as recently as July 2018. As a result, real average weekly earnings continue to grind higher, reaching 1.6% YoY in February, up from -0.7% in January 2017. Importantly, the four-quarter moving average of nonfarm productivity rose by 1.8% in 4Q18 from zero in mid-2016.

As for NFPs, Stanford economist Edward Lazear’s research shows that the initial print is the single most revised data point published in any given month. In fact, the data are so volatile that the most useful cut is the 12-month moving average (where seasonal factors are smoothed). The fading inflation rate implies that the Federal Reserve is correct to be “patient”; I believe a useful notion for this pause is “data dependency.” I doubt that we are looking at a rise of inflation in the short run, but the economy can surprise the Fed to the upside. It will be interesting to see how the Fed handles the next six months.

Please watch inflation on page 60 of the Global Perspectives book.

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