Friday’s PCE report contained some good news for the Fed. The core deflator (ex-food & energy) rose 0.48% m/m in May. The core CPI (ex-food & energy) was up by 0.74% m/m last month (+1.05% m/m ex-food, energy & shelter). The usual gap between the CPI and core deflator may be reasserting itself: substitution effects tend to depress the consumption deflator relative to the CPI. This could provide substance for the ‘transient inflation’ narrative.
There was no nasty shock for the Fed, but market repricing for earlier rate hikes will continue. Closely watched ‘alternative’ gauges of PCE inflation are starting to turn up, including the FRB of San Francisco’s Cyclical Core PCE inflation rate, and the FRB of Dallas’ Trimmed Mean PCE inflation rate.
Nevertheless, It is possible to rationalise the recent flattening of the yield curve by considering developments in semi-conductors, software investment and energy. Notably, there were sizeable upward revisions to investment in software in the national accounts for Q1, from an initial estimate of 18.14% q/q to 25.32% q/q, annualised. The investment trends that underpinned the run-up in asset prices in the long bull market prior to the Covid-19 pandemic remain entrenched, and if anything, have accelerated.
Summary
• Potential for burst in productivity growth
• Needed to keep ULC down
• ‘Amazon effect’ boosting wages
