Fed will continue to hike despite slight inflation disappointments – Nordea Markets

Analysts at Nordea Markets explain that on the US inflation front we got the second disappointment in the US core inflation compared to expectations (2.2% versus consensus of 2.3%).

Key Quotes

“Currently the core inflation momentum is not accelerating and while there are short-term (2-3 months) reasons to expect a flat-lining inflation pressure in the US, 2019 should show renewed core inflation pressure due to higher US wage growth.”

“We don’t judge that the Fed will put much emphasis on the inflation misses. After all, inflation is above 2% (the core PCE-deflator could drop slightly below 2% though), while the Fed has recently started to put more emphasis on containing financial excesses/lofty asset valuations, why the Fed can easily continue the quarterly hiking pace even with flat-lining US core inflation around 2%.”

“We need a much more dramatic sell-off than what we have seen this week for the Fed to change course. So far, it is almost as if the Fed would welcome less expensive asset prices, as they will likely choose to consider it a healthy mark to market of lofty asset prices that is helpful in the risk management of financial excesses.”

“The last two months of disappointing US core inflation has also marked a slight turning point for US inflation minus the inflation in the rest of the G10 space. We see a high risk that this trend will continue. Inflation in the rest of the world will catch up with US inflation. This should also help to contain the otherwise strong upwards pressure on the USD, which we have seen so far in 2018.”