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Inflation Is Back, But Don’t Worry — Ahead of the Tape

By Steven Russolillo
Good news: Inflation just topped a key milestone. Even better news: It doesn’t look poised to zoom much higher from here.
Consumer inflation in February jumped above the Federal Reserve’s 2% annual target for the first time in nearly five years, according to the central bank’s preferred personal-consumption expenditures price index. Two additional inflation readings this week should tell a similar story.
Economists surveyed by The Wall Street Journal expect readings on March producer and consumer prices, due Thursday and Friday morning, respectively, will remain unchanged from elevated levels a month earlier. Producer prices in February notched their biggest year-over-year advance since March 2012. Consumer prices are also coming off their biggest increase in more than three years.
Firming prices are a big change from the past few years when inflation stayed stubbornly low. The increase hasn’t been enough to get the market, consumers or the Fed worried about a serious bout of inflation. Inflation expectations are important because when people perceive inflation is headed higher, they tend to increase spending ahead of the price increases. That can drive actual inflation higher.
As Adam Slater of Oxford Economics puts it, one of the key factors driving expectations higher isn’t the fact that prices are soaring, but that people have stopped worrying so much about deflation. The odds of inflation falling below 1% on average over the next five years have fallen to just 12%, near the lowest levels over the past decade, according to market-based probabilities analyzed by the Federal Reserve Bank of Minneapolis. The odds were as high as 40% in February 2016.
“Markets were pricing a very high risk of something close to Japanese-style deflation in the U.S. a year ago,” Mr. Slater said.
Conversely, inflation isn’t expected to surge much higher from current levels either. Odds of inflation jumping to 3% on average over the next five years are just 18%, the market probabilities say. In 2015, the chance of inflation hitting 3% was in the single digits by that measure. “There is not much evidence of long-term inflation expectations becoming unanchored,” Mr. Slater said.
That is also evident in the bond market. Yields on 10-year Treasurys fell below 2.3% on Tuesday, their lowest close in more than four months. Higher inflation would lead investors to push up bond yields.
For now at least, inflation appears to be in the sweet spot for both the Fed and financial markets.
Write to Steven Russolillo at
12, 2017 11:57 ET (15:57

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