Subdued Inflation is Music to Powell’s Ears

Buried under the Tillerson firing headline this morning was news that US inflation is pleasantly subdued.  Consumer prices are advancing at a slowing pace. Investors, spooked by the possibility of escalating price growth and tightening interest rate policy, were mollified when they learned that the Consumer Price Index (CPI) rose only a tepid 0.2 per cent in February, substantially slower than January’s 0.5 per cent advance. The CPI expanded 2.2 per cent year over year through February compared to 2.1 per cent through January, according to the Bureau of Labor Statistics. The “core” rate, which excludes food and energy, rose 1.8 per cent over the last 12 months.

Of the major price components, transportation costs rose the most over the last year, gaining 4.1 per cent. Their advance was fueled in large part by a 12 per cent surge in gasoline prices over the period. Airfare, remarkably, fell roughly 5 per cent in the interim, while the prices of new and used autos were flat. Medical costs and education, two persistently costly CPI components, were contained.

Fed Chairman Jerome Powell must be breathing a sigh of relief. While the Federal Open Market Committee prefers the US Personal Consumption Deflator as its inflation gauge, today’s CPI news permits the Fed to pursue its normalization policy on a shallower trajectory. This suggests to me that interest rates will likely stay lower for longer, extending our “risk on” environment for now.