Inflation still not raising its head, from FT Alphaville
Most importantly, shelter, one of the largest (18% of core PCE) and most stable components of core inflation, has appeared to roll over in recent months. Housing prices have been steadily accelerating since the crisis, but recently, many of the fundamental drivers identified in our shelter inflation model – housing price growth, rental vacancy rates, and mortgage delinquencies – have either peaked or slowed significantly. While we do not expect housing inflation to collapse anytime soon, the consistent boost to core PCE from this category has likely already begun to fade.
Core goods prices have also been soft recently, and while these prices tend to be volatile, there are reasons for concern that this weakness might persist.
Auto prices, in particular, have deteriorated and weak fundamentals in this sector suggest a strong rebound is unlikely. Used auto supply has been steadily increasing, putting downward pressure on prices and new sales. At the same time, auto credit has been tightening amid an uptick in delinquency rates.
Inflation might start rebounding soon, perhaps if economic growth itself proves to have accelerated in the second quarter. But regardless of the implications for monetary policy, it simply isn’t right to say that this year’s weakness is mainly down to big swings in a couple of fringe components.
