US: Little increase in long-term inflation expectations - AmpGFX

Greg Gibbs, Analyst at Amplifying Global FX Capital, suggests that it appears that there has been little increase in long-term inflation expectations in the US. 

Key Quotes

“Market-based measures reached their lows in 2016, and have risen in recent years, but have been largely unchanged in 2018 to-date.  The University of Michigan survey of inflation expectations has been stable in recent years around 2.5%.”

“Stable near historically low long-term inflation expectations allows the Fed to move gradually on rate rises, even if near-term inflation picks up.”

“Nevertheless, core inflation has been creeping higher this year and is now around the Fed’s 2% target.  If inflation continues to rise it should place upward pressure on US yields and firm up expectations that the Fed will keep raising rates even as they move close to their perception of neutral rates.”

“Fed Chair Powell indicated in his Jackson Hole speech that he has limited confidence in academic models of neutral rates or NAIRU (r and u-star), and the Fed will be watching closely for clues in the economic data rather being guided by the stars.”

“The CPI data on Thursday is an important variable for the market.  Expectations are for core-CPI to remain steady at 2.4%y/y in August.  Higher wage growth and tariffs may place upward pressure on inflation in the months ahead, but the starting point for inflation is already now on target, raising risks that inflation becomes more of an issue for US policymakers and global financial markets.”

“Higher inflation will increase expectations that the Fed will move policy into a restrictive stance in the coming year or two, increasing downside risks for global asset prices, including US equities.”

“According to the Federal Reserve Bank of New York underlying inflation gauge, incorporating a wide array of price, activity and financial data, inflation pressure is at a high since 2006.  The prices only measure is at a high since 2012.”