Here we go again? A sniff of inflation expressed in Goldman Sach’s bringing forward of its first rate hike yesterday and markets begin to sneeze with the S&P falling sharply from record levels last night. Tim Duy of Fed Watch summarises it well as usual:
The Fed doesn’t target core inflation. They target headline inflation. But they also believe that headline inflation will revert to core, and as such tend to be more concerned with core inflation in excess of 2%. Consider the history of core inflation since 1985:
I included a 25pb “forecast error” band around the Federal Reserve stated 2% target for PCE inflation; no one believes they can consistently hit 2% in the short-term, hence it is a medium term target. The most obvious feature is that for the last twenty years, core measures of inflation have more often than not been at or below the the upper range of the Fed’s error band, especially for core-PCE inflation. Average core-PCE inflation: 1.7%. Average core-CPI inflation: 2.2%. Indeed, if core-PCE were the target, it is fairly clear that the Fed would have been on average undershooting its objective for the past two decades.