How The Fed Sees Inflation.

At 8:30 yesterday morning the latest report on inflation at the consumer level was flashed across every terminal n Wall Street.

This morning, again at 8:30 we’ll get the report on inflation at the Producer or Wholesale Level. And, like yesterday’s report Analysts expect that it too will show a lower level of inflation.

And like yesterday, many will guess just how these two reports will translate into the Fed’s Monetary Policy. For most, it was a simple equation of lower inflation and less tightening by the Fed.

But I suspect that things won’t be quite that easy when all is said and done.

For one thing, this is an especially difficult time to judge just what is the trending inflation in the country.

Now last Wednesday the Federal Open Market Committee released its statement at its last meeting. In that all-important opening paragraph, they make several points that are especially pertinent to inflation.

The very first sentence begins, in part:

“overall economic activity edged down in the first quarter, “

That’s critical. Essentially, this mitigates the fed’s over-tightening. Against the Fed raising rates too far and slowing the economy even more.

Later in that same release, the Fed will give three causes for inflation as they see it:

  1. Overall imbalances in supply and demand are related to the lingering effects of the Pandemic. And I would add the economic lockdown.
  2. Second, higher energy prices, and
  3. broader price pressures.

So let’s look at this one by one.

As for the Pandemic, it’s pretty much history now. At least I hope so. And there is very little the Fed can do about the economic ramifications of the Pandemic anyway. So rule this one as out of the Fed’s playing field. It is what it is.

As for higher energy prices. Again, as long as the Fed isn’t drilling oil wells, again really out of the Fed’s field.

Finally broader price pressure. Ah ha. This is what we’re looking for. And this is just what the Fed CAN do something about. Raising rates, will likely reduce overall demand pressure.

So it’s one out of three areas that the Fed’s monetary policy that will have a significant impact. Demand Pressure.

Next let’s look at how inflation is trending currently, from the Fed’s point of view.

I think there is every indication that the Fed saw March as the top of the mountain. That it was in March that we saw the most elevated point of inflation. And the CPI report yesterday, combined with today’s likely Produce Price Inflation will probably bear this out.

And I say this because later on in that latest Fed statement they say:

“…the Committee expects inflation to return to its 2 percent objective …”

This lays down the benchmark upon which, I believe, the Fed wants to be measured.

It’s almost saying relax guys, remember that 2% inflation we saw earlier. It will be here again.

And this makes sense if you think that much of the inflation that we’re seeing right now, is the residue from that incredible money pumping that was done at the end of the Pandemic. Particularly those corporate and individual stimulus checks.

And as we finish up April, it seems that the Fed’s optimism is panning out. Remember this Fed Statement was written almost 2 months ago.

In the meantime, we’ve seen that terrible March report that showed inflation topping at 8.5%. But for the Fed, it must have looked even worse. You see the fed has a favorite measure of inflation based on Personal Consumption Expenditures.

Each month the Dallas Branch provides a supplemental report to the PCE report. The Dallas report, just released, shows March inflation ballooning up to almost 11% on a 12-month basis.

That would have been a nightmare.

I have to believe that when Dallas prepares their April report it will be well below 11%.

So while everyone, and most especially the Fed, realizes that one month does not make a trend. And the fact that April is showing less inflation than March, is certainly NOT definitive. At least it’s a step in the right direction.

This combined with the Fed’s willingness to remind us of its overall, long-term target of 2%. This leads me to believe that the Fed is looking for a brighter inflation picture ahead.

Let’s at least hope so…

David

PS

A couple of very interesting, and very positive reports last evening. First came the news of a record surplus in US Tax receipts. Yes, I know it’s hard to believe, but the Federal Government just reported the largest surplus in its history, when April came in with a $300 billion dollar excess, receipts over expenditures.

April is, of course, tax month, when people pay their annual income taxes. And that too was an all-time record, at $864 billion in taxes paid.

Good job, from US Tax Payers.

Another job well done, from our friends across the pond, Great Britain. First-quarter GDP for the island Kingdom came in at a very positive 8.7% annual growth rate.

Placing the UK Behind only Saudi Arabia and Turkey with the strongest growth rate among the G20.

And, I hasten to add, light years ahead of the US, which as you’ll recall had negative growth reported in the first quarter.

In just a few minutes we will get the latest report on inflation at the producer level. And if Wall Street is correct, we should see something pretty remarkable here.

The Street expects Producer Prices rose at a very tame 1/2%. If that proves to be the case, it would tie September of last year as the lowest level in Producer Prices for the past 12 months.

Good to see this lower number.

But hard to tell if it’s a true reduction in wholesale inflation. Or simply a lack of available raw materials and components.

Remember Shanghai is still closed, and I suspect that we are missing all of their shipments.

Also reporting this morning will be the initial claims for unemployment for last week.

We are starting to see an uptick in these numbers. Never a good sign.

The street is looking for 200k initial claims this morning, up from 195k the week before.

In earnings so far this morning, we’ve had a couple of European Companies report.

First Dutch insurance company, Aegon, and then software company Nice both received a positive response from traders.

On the other hand, US-based fashion company Tapestry is trading lower at the moment.

In a few minutes, we will get the latest from, US Food Holdings, food tech company, Toast, and department store chain, Dillard’s.

Have a great day!

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