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The problem with inflation expectations

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  • Japanese core CPI inflation rose, but as Japanese core CPI includes energy this was actually due to imported energy costs. Energy, as a high frequency purchase, will disproportionately impact inflation expectations. The problem is consumers expect falling incomes alongside the rising prices.
  • There has been some media comment that the Fed will leave the bond buying program unchanged in July (of course it will, no one thinks otherwise) but it will also look to use forward guidance to try to keep rates low. To be honest, it is already doing this, so the market reaction to the stories seems excessive.
  • Geopolitical concerns may be a focus for some investors, with tensions in Egypt continuing. The army has called for people to protest (a relatively unusual turn of events) and the Muslim Brotherhood seems to be taking a relatively militant stance.
  • The data calendar is very quiet again. Final Michigan consumer sentiment figures from the United States may raise a flicker of interest, but little more. The French offer some consumer confidence numbers as well.

Listen to the audio version of this briefing.