The Fed is becoming increasingly trapped: despite the FOMC’s “best intentions” to telegraph that the economy is improving with the unemployment rate at a paltry 4.3% – because otherwise it clearly wouldn’t be hiking, right – CPI has now missed consensus estimates for 5 consecutive months, and what worse, the biggest historical driver of inflation in recent years, shelter and rent inflation, appears to have peaked and is now declining. Worse, wage inflation is nowhere to be found, much as one would expect from a bartender and waiter-led “recovery.”
Of course, never one to miss a scapegoat, earlier today Dallas Fed president Robert Kaplan blamed the lack of inflation on technology, saying at an event in Texas that technological disruption is “a new and powerful structural factor that is influencing inflation” and finally noticing that “technology is increasingly replacing people in the jobs market” while “allowing consumers to change shopping habits, and is limiting the pricing power of businesses. That – in addition to global factors – has an impact on inflation.”
Predictably there was no discussion of how it is the Fed’s trillions in excess liquidity that has allowed VCs to invest tens if not hundreds of billions in money-losing ventures, which have made this tech-driven deflation possible.
As an aside, while the BLS-reproted CPI continues to deteriorate, the Atlanta Fed reported that its own sticky-price consumer price index —a weighted basket of items that change price relatively slowly—rose 2.6% annualized in July, following a 2.2% increase in June. The 12-month percent change in the index remained at 2.1%. Then again, the Fed is known to avoid any indicator that defies the prevailing groupthink, which now seems to be that inflation is lower than the Fed would like it to be.
So while the Fed ponders how to escape this trap it has created for itself, in which zombie companies refuse to die and where cash burning tech companies push inflation ever lower, at least until rates rise enough to crush the VC party once and for all, here is Goldman which moments ago once again cut its forecast for a rate hike possibility in 2017.
The consumer price index rose 0.11% in July in both the headline and the core, missing expectations for the fifth consecutive month. The primary sources of weakness were lodging away from home and new vehicle prices, and we suspect the former will rebound in coming months. Nonetheless, we now estimate that the core PCE price index rose just 0.08% month-over-month in July, or 1.40% from a year earlier, down from +1.5% in June. Accordingly, we now place the subjective odds of a third hike this year at 55% (vs. 60% previously).
- The consumer price index (CPI) rose 0.11% month-over-month in both the headline and the core (excluding food and energy), below expectations for the fifth consecutive month. Food prices rebounded (+0.2%) but energy prices edged down (-0.1%), providing offsetting impacts for the headline CPI, where the year-over-year rate moved up a tenth to +1.7% (vs. consensus of +1.8%). Relative to our expectations, the sources of weakness in core inflation this month were lodging away from home (-4.2% mom) and new car (-0.5%) prices, which together reduced month-over-month core inflation by -0.07pp. The lodging decline was the largest on record (back to the 1960s) and appears at odds with continued firmness in the PPI and industry measures. Despite the overall weakness, month-over-month inflation was generally firm in the large and persistent housing and medical care categories, with increases in medical services (+0.3%), medical commodities (+1.0%), and owners’ equivalent rent (+0.27% vs. +0.28% in June) prices, despite the sequential deceleration in rent of primary residence (+0.24% from +0.35% in June).
- Based on details in the PPI and CPI reports, we estimate that the core PCE price index rose just 0.08% month-over-month in July, or 1.398% from a year earlier (vs. +1.505% in June). Additionally, we expect that the headline PCE price index rose 0.08% in July, or +1.392% from a year earlier.
- Despite encouraging component detail, the overall CPI report was clearly disappointing. We lowered our Fed probabilities accordingly, with subjective odds for a third hike this year at 55% (vs. 60% previously). In terms of timing, we place the odds of the next hike at less than 5% for September (vs. 5% previously), less than 5% for November (vs. 5% previously), and 55% cumulatively by December (vs. 60% previously).
At the current rate of economic disappointments, that 55% will hit zero in about 4-6 weeks.
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