US: Widely-expected pickup in inflation remains some months away – Wells Fargo

Data released on Wednesday showed the Consumer Price Index (CPI) increased 0.4% in December and 1.4% from a year earlier. Analysts at Wells Fargo point out core inflation slowed in December and underscores that on its own, the pandemic is a disinflationary event. 

Key Quotes: 

“On a year-ago basis, CPI inflation moved up in December but remains weak at 1.4%. The 12-month change in the CPI is set to pop in the spring, however, reaching roughly 3% in May after prices collapsed last year during initial lockdowns for categories like gasoline, hotels, and apparel. But the easy base comparisons will overstate the degree of price pressures we expect this year. We anticipate inflation to firm over 2021 as consumer spending roars back in the second half of the year, but do not expect inflation will be off to the races.”

“The Fed likely will not be spooked by the year-over-year pop in inflation this spring. Inflation is a process, driven by ongoing prices changes rather than one-off adjustments in reaction to specific events. Instead, the FOMC will be focused on signs that the strengthening in inflation will be durable. Inflation expectations will play a crucial role in that assessment. Market measures of inflation expectations have been rising, but consumer measures remain near historic lows. That could change in the second half of the year when realized inflation is higher, but we suspect it will be some time before inflation returns to a pace consistent with the Fed’s target and the FOMC is confident it can stay there.”