Uncomfortably low inflation. Inflation rates have surprised to downside.




“Inflation remains subdued and well below Fed’s 2% target. Our “inflation tracker”, which includes a range of measures related to core inflation translated into core PCE terms, currently stands at 1.2%, slightly lower than in mid-2013. Likewise, our CPI diffusion index, which measures the breadth of price increases in individual CPI categories, has edged down further since mid-2013.” (Goldman Sachs)


Inflation (1)

Inflation (2)


“We think pace of convergence back to Fed’s 2% PCE target will be slow – labor market still exerting downward pressure on price inflation. The underlying trend calculated from the three primary measures of hourly wages—average hourly earnings, the employment cost index, and compensation per hour—is still only growing 2%. Going forward, we expect only a modest acceleration to perhaps 2.5%. Meanwhile, we expect productivity growth to reaccelerate to 1.5%-2%. Together, these numbers imply unit labor cost growth of 0.5%-1%, which would be slightly below the rate of price inflation of 1%-1.5%.” (Goldman Sachs)


CPI Inflation

“CPI inflation rates have surprised to downside and converged lower across countries – largely attributed to decline in commodity prices – has put downward pressure on industrial input prices.”


inflation (1)

inflation (2)

However, low inflation isn’t strictly a U.S. phenomenon. All around the world, inflation has been much more benign than forecasted by economists.

inflation (3)

Inflation & ECB Rate Cut

“We continue to expect no MRO rate cut from the ECB this week, but it is a close call. (i) The weak October inflation reading has increased considerably the likelihood of an ECB rate cut before year-end. Our baseline scenario, however, remains one of unchanged policy rates. The crucial issue is whether the October inflation reading signals that weaker underlying price pressure or one-off effects are responsible for the undershooting. (ii) If the mood in the Governing Council were to swing towards an MRO rate cut, we would expect the cut to happen in December rather than this week. (iii) We continue to expect the ECB to prevent any meaningful rise of market rates “for an extended period”, most likely via offering another longer-maturity LTRO during the first half of next year.” (Goldman Sachs)

“…..hold short across European and US duration, and expect stocks to outperform fixed income.”


In the second quarter inflation fell to 0.8 %, this from an upward-revised 1.4% in the first quarter. The lowest level on record for Core PCE inflation is 0.7 %. That was in the first quarter of 2009. Core PCE touched 0.7 % twice in the early 1960s, that is as far back as the data go.

“Although inflation remains well below Fed’s 2 % target, some signs that it is bottoming out. The core PCE index rose 0.22 % in June, and the year-to-year rate is now back up to 1.22 % from the 1.06 % reported a couple of months ago (mostly because of revisions). Over the next few months, inflation is likely to edge up. PCE health care service prices are likely to rebound from the first outright quarterly drop in over 50 years, and the hurdle for an increase in the year-to-year rate is low because we are dropping out very weak sequential inflation readings in 2012Q3.” (Goldman Sachs)

Core PCE Inflation