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By HaleStewart November 19, 2017 7:39 am
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US Bond Market Week in Review: The Fed's Inflation Problem With Illustrations

            The Federal Reserve has an inflation problem.  No, inflation is not too hot.  In fact, it’s too cold.  More importantly, the Fed continues to rgue inflation will eventually hit and maintain 2%.  But the underlying trend says otherwise. 

            First, the PCE implicit price deflator is the Fed’s preferred inflation measure (This document from the BEA explains the differences between this and CPI).  Let’s begin by looking at the 3, 6 and 12 month moving average of the overall PCE price index.

The 3-month average (in blue) briefly hit 2% at the beginning of this year but has since been moving lower.  The 6-month moving average (orange) has been declining since the 2Q17.  The 12-month moving average (silver) is rising, but its rate of increase is declining.  With the 3 and 6 month moving average moving lower, it’s unlikely it will attain 2%.

            The core PCE index is far more deflationary:

This index briefly hit 2% in 2011.  Since its highest level has been below the Fed’s 2% target.  Most importantly, all three moving averages are now moving lower.

            Core CPI closely resembles core CPE prices:

The number are slightly higher: core CPI’s moving averages peaked around the 2.5% level last year.  But all three have since declined and continue to move lower.

            Only overall CPI – a measure the Fed ironically doesn’t use – shows any possibility of hitting 2%:

The 3-month moving average (in blue) is now slightly above 2% as is the 12-month average (in sliver).  The 6-month number (in orange) is below 2%, but the 3-month average will start to pull that number higher over the next few months.

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 


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