U.S. Inflation Intermission

Joe Mac's Macro Blog: May 12, 2017

MRP believes that the more than fourfold increase in the Fed's balance sheet and prolonged period of zero interest rates has set the stage for a significant rise in U. S. Inflation rates. The inflation that logically could've been expected to materialize from those hyper-stimulative monetary policies was arguably delayed by the sluggishness of the economic recovery and a very long road to reduced unemployment.

But, since unemployment has fallen below 5%, price measures have been perking up. Indeed between the fall of 2015 and two months ago, the CPI year-to-year change had risen from zero to 2.7%.

This morning's CPI numbers for April, however, showed slowing inflation pressures, following mostly similar trends in March. It is not that prices are falling. Rather, in March and April they have been rising but at a shrinking rate.

Especially notable was the softness in the CPI Ex Food & Energy. Sequentially, core prices have been flat over the past two months down 0.1% in March and up 0.1% in April.

The easing of inflation pressures should be good news for those hoping for a slowdown in the Fed's path towards interest-rate normalization. Meanwhile, there are several MRP themes that are partly based upon an accelerating U.S. inflation scenario: our  bearish position on long-term bonds, our call that the dollar has been peaking and will be moving sideways to down, and the  related themes on goldminers and emerging markets. They are all tied one way or another to a belief that inflation will be continuing to accelerate.

We believe that the slower pace of price increases over the past two months will prove transitory. It is clearly not consistent with other data such as the latest import price index or the PPI. Consequently, we are sticking with the themes described above and expect to see steadily worsening inflation numbers over the balance of the year.  

For MRP’s research disclaimer, please go to: www.mcalindenresearchpartners.com/disclaimer.html

Joseph McAlinden, CFA, is the founder of McAlinden Research Partners and its parent company, Catalpa Capital Advisors. He has over 50 years of investment experience. Previously, he was at Morgan Stanley Investment Management for over 12 years, first as chief investment officer and then as chief global strategist. During his 10 year tenure as CIO, Joe was responsible for directing MSIM’s daily investment activities and oversaw more than $400 billion in assets. As chief global strategist, he developed and articulated the firm’s investment policy and outlook. Joe frequently appears in the financial media including Bloomberg Television. Follow JoeMac on Twitter