Something for everyone

Is inflation higher or lower?

That’s what markets debated last week. On the one hand, a survey done by the New York Federal Reserve shows 1-year-ahead inflation expectations falling from 3.36% to 3.01%, but on the other hand, consumer prices accelerated in December and over the last 12 months. But on the third hand, the last 12-month core Consumer Price Index slipped from 4.0% to 3.9%. This sums up why markets are a little off-balance: there is something for everyone when reading through the economic data. 

The key takeaway is that inflation is on the right path (moving lower), despite the underlying details in any given month acting a little squirrelly. Why this matters is that the Fed will not cut short-term interest rates until it sees sustained progress toward subduing inflation. The main variable is how long that will take. Recall last month Fed Chair Powell opened the door to rate cuts even before inflation reaches the vaunted 2% target. Markets are trying to uncover that trigger point. They expect the Fed to make as many as six quarter-point cuts this year, despite policymaker’s own projections for only three. The Federal Open Market Committee’s next meeting takes place Jan. 30-31, but few expect any changes.