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How Low Can They Go: New Statistical Measures of Inflation could move Fed to cut rates

May 02, 2019

We Crunch the Numbers, You Make the Trade.We Crunch the Numbers, You Make the Trade.
We Crunch the Numbers, You Make the Trade.We Crunch the Numbers, You Make the Trade.

 

  • While the market was betting an interest rate cut was coming, the Fed disappointed when it said it presently has no bias on whether to cut rate or hike rates as its next move
  • The Fed cited slowing growth and falling inflation as reasons for its stance
  • On the inflation question, the primary concern in that core inflation, as measured by the PCE (personal-consumption expenditures), has dropped to 1.6% in March from 2% in December
  • The Fed prefers PCE to be around the 2% level
  • The Fed stated that the reasons for the inflation slow-down are transient: 
    • the drop in fuel prices last last year
    • the drop in the stock market that dented consumption and pressures in prices and
    • new statistical methods to measure apparel inflation that showed it lower

US Personal Consumption Expenditures (PCE) - 1 Year

US PCE

Source: Bloomberg

 

  • Critics of the Fed argue it has cited transient inflation pressures countless other time, when in reality they are often structural to a sector or industry
  • Federal statics agencies that provide the Federal Reserve with most of its data have embarked on a plan to update the quality of their data by expanding the set of data they collect-more data from a more varied mix of sources
  • Where this expanded data set has already been adopted-apparel prices, for instance-inflation has been shown to be lower than the past trends
  • As these new data sets get rolled out, there is a good chance inflation could be shown to be lower structurally, leading the Fed to have to cut rates to get it back close to target 

 

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