Capitol Report: Why inflation still isn’t rising fast enough to trigger four Fed rate hikes in 2018

This post was originally published on this site
AFP/Getty Images

The forces pushing inflation higher appear to be losing some steam.

Just you wait, inflation is coming, a lot of Wall Street pros warn.

Maybe so. But it’s still far from clear that inflation will rise fast enough to force the Federal Reserve to raise interest rates four times in 2018 instead of three as previously expected.

After a January scare, inflation moderated in February. Worker wages grew more slowly and so did consumer prices.

Granted, the trend is still up. The consumer price index, for example, has risen 2.2% in the past 12 months and it’s not far off a six-year high. Rising prices of oil, homes and rent are largely to blame.

The long-run picture on inflation could also take a turn for the worse in March. The yearly rate of inflation could spike to 2.5% if the CPI increases as much as it did in February.

How come? Consumer prices fell sharply in March 2017 because of a weird plunge in the cost of wireless service. That’s kept the yearly rate of inflation looking rather tame despite the tightest labor market in years and rising prices for key staples such as shelter and energy.

“Okay, fine, but just wait until next month . . . That will be the rallying cry for those who have been sounding the inflation alarm bell,” contended Richard Moody, chief economist of Regions Financial.

But after that? Inflation is not assured to keep rising.

For another view read: The most important chart in the world, updated for February CPI data

For one thing, oil has stabilized early this year after a sharp runup in the second half of 2017. The cost of a barrel of crude sits near $60, down from nearly three-year peak of $66 in January.

Also Read: Cold, hard cash isn’t being dethroned by the Bitcoins, Venmos and PayPals of the world

The cost of housing and rent is also rising more slowly. The 12-month increase in shelter slipped to 3.1% in February from 3.5% a year earlier. Home builders are ramping up construction of single-family homes and there’s been a surge in the number of rental units available.

Then there’s the surprising weakness in medical costs, another major household expense. They have risen just 1.8% in the past 12 months — half as fast compared to a year earlier.

Car prices have also stalled. They fell 0.5% in February and are down 1.5% over the past year. They haven’t fallen that much since the tail end of the Great Recession in 2009.

“New and used-car prices returned to the deflation territory, as expected, as the post-hurricane surge in demand appears to have faded away,” economist Pooja Sriram of Barclays wrote in a note to clients.

The surprising plunge in telecommunications prices last year, meanwhile, has been countered in early 2018 by unusually large increases in the cost of clothes and auto insurance that simply aren’t sustainable.

The cost of auto insurance, for example, has hit a nine-year high. And apparel prices soared by more than 1% in both January and February — the biggest back-to-back gains since 1990. The cost of clothes had fallen for three straight years until this sudden and seemingly inexplicable turnaround.

Add it all up and the forces pushing inflation higher appear to be losing some steam.

Read: Worry about rising inflation? Sure, but there’s no reason to be scared

“The details of the report, away from a large boost from apparel prices, were soft, reinforcing our view that the underlying pace of inflation has not materially picked up,” economist Andrew Hollenhorst of Citibank wrote.

More from MarketWatch

More Coverage
Be Sociable, Share!

Related Posts


MarketTamer is not an investment advisor and is not registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory Authority. Further, owners, employees, agents or representatives of MarketTamer are not acting as investment advisors and might not be registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory.

This company makes no representations or warranties concerning the products, practices or procedures of any company or entity mentioned or recommended in this email, and makes no representations or warranties concerning said company or entity’s compliance with applicable laws and regulations, including, but not limited to, regulations promulgated by the SEC or the CFTC. The sender of this email may receive a portion of the proceeds from the sale of any products or services offered by a company or entity mentioned or recommended in this email. The recipient of this email assumes responsibility for conducting its own due diligence on the aforementioned company or entity and assumes full responsibility, and releases the sender from liability, for any purchase or order made from any company or entity mentioned or recommended in this email.

The content on any of MarketTamer websites, products or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options and other securities involves risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities is not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options. The educational training program and software services are provided to improve financial understanding.

The information presented in this site is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing in our research constitutes legal, accounting or tax advice or individually tailored investment advice. Our research is prepared for general circulation and has been prepared without regard to the individual financial circumstances and objectives of persons who receive or obtain access to it. Our research is based on sources that we believe to be reliable. However, we do not make any representation or warranty, expressed or implied, as to the accuracy of our research, the completeness, or correctness or make any guarantee or other promise as to any results that may be obtained from using our research. To the maximum extent permitted by law, neither we, any of our affiliates, nor any other person, shall have any liability whatsoever to any person for any loss or expense, whether direct, indirect, consequential, incidental or otherwise, arising from or relating in any way to any use of or reliance on our research or the information contained therein. Some discussions contain forward looking statements which are based on current expectations and differences can be expected. All of our research, including the estimates, opinions and information contained therein, reflects our judgment as of the publication or other dissemination date of the research and is subject to change without notice. Further, we expressly disclaim any responsibility to update such research. Investing involves substantial risk. Past performance is not a guarantee of future results, and a loss of original capital may occur. No one receiving or accessing our research should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing any applicable prospectuses, press releases, reports and other public filings of the issuer of any securities being considered. None of the information presented should be construed as an offer to sell or buy any particular security. As always, use your best judgment when investing.