We expect inflation to continue falling throughout 2017. This will contribute positively to U.S. economic growth since inflation subtracts from "real" GDP.
Evidence? Below is analysis and four charts from Hedgeye U.S. Macro analyst Christian Drake in a 42-slide presentation to subscribers of The Macro Show, our daily financial market video broadcast. Click here to try a free month of The Macro Show.
1. Inflation: 62 Months Below The Fed's 2% Target
"This is Core PCE, the Fed’s preferred measure of inflation. You can see it missing the Fed’s 2% target almost 100% of the time since the Great Recession. This has been conspicuously going the wrong way up until May. There may be some semblance of stability, May being +1.51% year-over-year. This does provide policymakers some optionality for framing up the narrative. The Fed’s narrative happens to be hawkish so policymakers could start to say once again they expect inflation will return back to target over the medium term."
2. Reflation's Rollover
"We got a similar kind of move out of the CPI. Headline CPI ticked up 10 basis points to 1.73% year-over-year. This was the first acceleration in 4 months. Core inflation held flat at 1.7% year over year. That was flat for a third straight month.
But, as you can see in the highlighted portion of the chart below, the headline comps get progressively harder here over the next couple months. This is the backbone of our baseline on Reflation’s Rollover and expectation for further deceleration in inflation over the balance of the year as comps steepen."
3. CPI: Out of Breadth...
"It’s not just energy. The disinflationary impulse has been pretty broad-based. What you see here is the breadth of CPI componentry. As you can see we’re below 50%. So there has been a little bit of improvement in the last two months but still less than 50% of the subindustries are accelerating."
4. Inflation ↓ = GDP ↑
"This is the kindergarten version. But if headline, nominal growth is largely flat and your GDP deflator (i.e. inflation) goes down that pushes real growth up. That is what we’re seeing. We’re seeing that show up. We got real income numbers, real hourly earnings numbers last Friday. You can see the acceleration coming through in the first quarter as disinflation accelerated, real income growth is going up. We expect that to flow through to the consumption numbers throughout 2017."
