US: Will the Fed react to policy-induced inflation shocks? – Deutsche Bank

The annual growth rate of the core PCE deflator, the Fed's preferred inflation metric, has risen from a recent trough of 1.3% (July 2015) to 1.7% at present notes analyst at Deutsche Bank.

Key Quotes

“However, recent CPI data were stronger than anticipated, which raises the question of whether the Fed may be falling behind the inflation curve. We do not believe this to be the case, and as recent Fedspeak suggests, neither do most monetary policymakers.”

“To be sure, legislative developments, namely, the likely repeal of the Affordable Care Act (ACA) and the possible implementation of a border adjustment tax (BAT), could meaningfully impact consumer prices. While these issues have the potential to distort inflation significantly in a relatively short period of time, we do not believe that they will result in the Fed rethinking its stated strategy of "gradual" removal of policy accommodation, at least not yet. However, if the economy continues to strengthen into 2018 as we expect, the Fed will likely pick up the pace of interest rate hikes next year because inflation pressures are likely to intensify.”