Even if tomorrow’s report shows that inflation in the month of January was hotter than the past few months, when measured against the base of twelve months ago, the headline inflation number the media will tout will still show a decline (“inflation moving in the right direction” – lower).
That said, even if the monthly number tomorrow is surprisingly weak, the headline year-over-year number will still be a big number, relative to the inflation that the Fed is targeting (2%).
Bottom line, the year-over-year headline inflation is still likely running around 6%. And, it will continue to measure at historically high levels in the months ahead, regardless of what’s really happening with current inflation. Why? Base effects. Because of the aggressive rate-of-change in prices twelve months ago, the most recent CPI Index reading will continue to be measured against a very low base.
Now, for Reason #2 (that the market will likely ignore a hot monthly inflation number tomorrow): The Fed’s favored inflation gauge is core PCE. And the effective Fed Funds Rate is now above core PCE.
And as the Fed has reminded us, the inflation storms of the past have only been quelled when interest rates are taken ABOVE the rate of inflation. Not only are they there, but they’ve built in expectations that they will do a couple more rate hikes, for good measure.
The hawkish expectation setting by the Fed, should reduce (if not eliminate) the potential for a negative surprise (and adverse market reaction) in tomorrow’s inflation report.