Must-Read: Cardiff Garcia: Slower US inflation isn’t just the result of “transitory” factors

Must-Read: Federal Reserve not marking its beliefs to market edition:

Cardiff Garcia: Slower US inflation isn’t just the result of “transitory” factors: “Despite cautionary remarks from a few of its dovish members, the Federal Reserve seems determined to continue uninterrupted down its course of gradual policy tightening… https://ftalphaville.ft.com/2017/07/07/2191021/slower-us-inflation-isnt-just-the-result-of-transitory-factors/

…The slowing of inflation since the start of the year is not yet a deterrent. From the FOMC minutes to the June meeting released this week, our emphasis:

Recent readings on headline and core PCE price inflation had come in lower than participants had expected…. Most participants viewed the recent softness in these price data as largely reflecting idiosyncratic factors, including sharp declines in prices of wireless telephone services and prescription drugs, and expected these developments to have little bearing on inflation over the medium run.

Measures of inflation have fallen even further since that meeting…. Mobile telephony (about 1.1 per cent of core PCE inflation) did experience what is likely to be a one-off shock thanks in part to the proliferation of “unlimited” wireless data plans, while drug price inflation (4 per cent of core PCE) is undergoing a correction after a period of rapid increases last year. But there’s a problem with the “idiosyncratic factors” explanation, which is that non-idiosyncratic factors are also pressuring inflation downward:

The charts from… Credit Suisse economists…. According to the economists, with our emphasis:

Most importantly, shelter, one of the largest (18% of core PCE) and most stable components of core inflation, has appeared to roll over in recent months…. Core goods prices have also been soft recently…. Auto prices, in particular, have deteriorated**….

Inflation might start rebounding soon, perhaps if economic growth itself proves to have accelerated in the second quarter. But regardless of the implications for monetary policy, it simply isn’t right to say that this year’s weakness is mainly down to big swings in a couple of fringe components.

Pedro da Costa: Fed worried about inflation below target: “Fed officials have good reason to be leery of their own forecasting prowess… http://www.businessinsider.com/fed-worried-about-inflation-below-target-2017-7

… As this chart from Deutsche Bank Economist Torsten Slok shows, their optimism has been considerably misplaced for several years running now…