US CPI: focus on the trend, not the noise

Thought of the day

by Chief Investment Office 14 Feb 2018

The latest US consumer price inflation (CPI) figures will do nothing to soothe market fears of faster monetary tightening. January CPI rose 0.5% for the month, topping expectations for 0.3%. The core year-on-year reading, which had been expected to fall, instead held steady at 1.8%. And the three-month annualized gain in the core reading hit 2.9%, the fastest rate since 2011.

S&P 500 futures fell by 1% and 10-year US Treasury yields rose four basis points to 2.87% after the data. But it's important for longer-term investors to put a single data point into context:

  • The equity sell-off started after January’s higher-than-expected 2.9% year-on-year increase in average hourly earnings, a new high for the post-crisis period. But almost all the rise came from supervisors and nonproduction workers, who may save more of their income, whose wages rose 5%. The data is volatile too: last February and July, wages for this small subset also jumped, but the rise wasn’t sustained.
  • Better productivity growth may allow wages to rise without spurring inflation.
  • The Fed's preferred inflation measure, core Personal Consumption Expenditures, has been below its 2% target for nearly the entire post-crisis period. The target is meant to be hit on average, and does not represent a ceiling on what the Fed will tolerate.

So while we recognize that momentum and sentiment can be powerful short-term market forces, we believe investors should focus on long-term trends. We believe inflation is likely to rise only gradually toward the Fed’s target and see at most one rate hike per quarter in 2018, but will continue monitoring developments.

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