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26 Feb 2015
US inflation falls into negative territory, deflation might not be temporary – Rabobank
FXStreet (Barcelona) - The Rabobank Team comment on the impact on Fed’s 2% inflation target and the probable rate hike after US CPI registered a negative number for the first time since October 2009, falling to -0.1%.
Key Quotes
“The Fed’s inflation target is 2% (in terms of the PCE deflator). That’s why the fall in inflation causes a dilemma for the Fed. On the one hand, the Fed sees this deflation as transitory and even beneficial to household purchasing power. Given the substantial progress in the labor market, the FOMC would like to end the near-zero interest rate policy.”
“On the other hand, raising the policy rate in a period of negative inflation readings may give the impression that the Fed does not take the price stability component of its dual mandate very seriously.”
“In fact, the FOMC is already monitoring the inflation expectations of consumers and financial markets closely.”
“After all, if low inflation figures are going to drag down inflation expectations, this could have a negative impact on core inflation through the wage-price mechanism. In that case, deflation is no longer a temporary phenomenon and the 2% inflation target might remain out of sight for a prolonged time.”
“For now, consumer inflation expectations – as measured by surveys – remain stable. This is supporting the FOMC’s conviction that deflation is transitory.”
“All’n all, the FOMC would like to see more evidence that inflation is going to return to its 2% target before the first rate hike. However, we think it may take some time before the data are going to convince the FOMC.”
“It may take until the final quarter of the year before inflation returns to positive territory. Therefore, we continue to have our doubts about a June rate hike and we still think that Q4 is more plausible.”
Key Quotes
“The Fed’s inflation target is 2% (in terms of the PCE deflator). That’s why the fall in inflation causes a dilemma for the Fed. On the one hand, the Fed sees this deflation as transitory and even beneficial to household purchasing power. Given the substantial progress in the labor market, the FOMC would like to end the near-zero interest rate policy.”
“On the other hand, raising the policy rate in a period of negative inflation readings may give the impression that the Fed does not take the price stability component of its dual mandate very seriously.”
“In fact, the FOMC is already monitoring the inflation expectations of consumers and financial markets closely.”
“After all, if low inflation figures are going to drag down inflation expectations, this could have a negative impact on core inflation through the wage-price mechanism. In that case, deflation is no longer a temporary phenomenon and the 2% inflation target might remain out of sight for a prolonged time.”
“For now, consumer inflation expectations – as measured by surveys – remain stable. This is supporting the FOMC’s conviction that deflation is transitory.”
“All’n all, the FOMC would like to see more evidence that inflation is going to return to its 2% target before the first rate hike. However, we think it may take some time before the data are going to convince the FOMC.”
“It may take until the final quarter of the year before inflation returns to positive territory. Therefore, we continue to have our doubts about a June rate hike and we still think that Q4 is more plausible.”