Is the Disinflation Trend Nearing An End?
A bottoming process in the disinflation trend of the past 18 months appears to be underway. The current run rate for inflation is best measured using three-month moving averages. Core inflation is currently 4.0%, up from 3.2% in the previous three months and a cyclical trough of 2.6% during the third quarter of last year. The underlying driver of future inflation is vigorous aggregate demand in a tight labor market, with most industries operating at full capacity. A dearth of economic slack is the primary enabler for workers to achieve negotiating power and for businesses to exercise pricing power.
A combination of healthy economic growth and a rising trend in inflation will compel the Federal Reserve to maintain a tighter monetary policy than generally expected. The FOMC will cut rates no more than twice this year, far less than anticipated. The implication is that investors should be prepared for another upleg in government bond yields as the year unfolds. Because of the tight correlation between bond and stock returns, a sustained rise in bond yields could trigger an equity market selloff at any time... READ MORE
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