![]() “While Powell now seems to be more comfortable with the transitory inflation narrative, he also emphasised the importance to remain vigilant for evidence that inflation pressures are becoming more broad-based and thus persistent. In contrast with headline and core measures of inflation, underlying inflation is thus close to the Fed’s 2% inflation objective,” they report. ![]() The latter is consistent with the trimmed mean PCE measure which is now at the Fed’s target. “Our monthly mean estimate of underlying inflation edged 3bps higher to 2.05% in July, while the median estimate increased 6bps to 2.02%. Luzzetti and colleagues are only modestly adjusting their trend measures of US inflation in response. Source : FRB Dallas, BEA, Haver Analytics, Deutsche Bank For example, though vehicle prices remained elevated at +0.9% in month-over-month terms, which was well below the more than 3% monthly gains over the last quarter.”įigure 2: Measures of broad-based US inflation generally remain moderate “Several sectors that were at the epicentre of prevailing supply-demand bottlenecks have shown some progress towards normalising. Some encouraging trends were evident within the August data, the team noted. Nonetheless, US core personal consumptions expenditure (PCE) inflation in July maintained the strong momentum of the previous three months in July, inching four basis points higher to 3.6% year-on-year, its highest reading since the early 1990s, although “once again a handful Covid-related categories” accounted for most of the increase. Persistent global disinflationary forces.Moderating rice gains in high-inflation terms and.Inflation expectations remain anchored.Little sign of inflationary wage gains.However as noted in their 31 August white paper, ‘ US Economic Perspectives: Trend inflation dashboard supports Powell’s Jackson Hole message’, Deutsche Bank’s US Chief Economist Matt Luzzetti and colleagues noted that Powell had offered five reasons to support their view that “the recent inflation spike was likely to prove temporary” and among them “was the “absence so far of broad-based inflation pressures.” Others were listed in the team’s separate note ‘ DB Fed Watcher: Jackson Hole affirms that September is too soon for tapering’, also published 31 August (and in May Bloomberg actually listed six reasons 3 why the Fed was unperturbed): And in the process, he has presided over a bold gamble, keeping policy ultra-loose even as inflation soars.”Īs flow reported in our July article ‘ Inflation: where next?’ the message from the Fed and others that the re-emergence of inflation will be short-lived has failed to convince many analysts. He has led a landmark shift in the way it thinks about interest rates. “Mr Powell has refined the way the Fed communicates, targeting his messages at ordinary Americans rather than economists. The speech was consistent his previous performances, commented The Economist in its 3 September issue. ![]() Powell also played down fears that either the US or wider world is on the brink of any inflationary spiral to warrant a sudden tightening of monetary policy an outlook shared by other central banks including the Bank of England and European Central Bank (ECB), said Nixon. Eight years on Powell had proved more successful than his predecessor by convincing markets that “even if tapering starts later this year, interest rate rises may still be some way off”. The ensuing sharp rise in US bond yields and fall in stock markets had threatened to trigger a fresh crisis by pushing up borrowing costs and derailing fragile emerging market recoveries and it needed Bernanke’s “intensive damage limitation” to soothe market nerves. At that time the Fed – then with Ben Bernanke as its chairman – had signalled “what investors considered a premature tightening of monetary policy in the aftermath of a long crisis”. Investors worldwide were reassured, having previously fretted over a possible repeat of “the 2013 taper tantrum”, wrote Simon Nixon in The Times of London on 2 September. At the same time, the Fed chief “also struck a dovish tone that was picked up by investors, as he stressed that tapering was not a signal for eventual rate hikes, and warned that monetary policy should not respond to transitory inflation pressures, as any moves to tighten prematurely could needlessly slow hiring and keep inflation too low.”
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