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Jerome Powell seems to be right, in part, on the transitory factors weighing on inflation.
Federal Reserve Chairman Jerome Powell at last week’s press conference contended that recent weakness in inflation was the result of so-called “transitory” factors that will unwind.
“I think there’s good reason to think that these readings are particularly increased by some transitory factors,” Powell said, explaining why core PCE prices grew just 1.6% in the 12 months ending March. “One that I would mention is portfolio management services which would tend to go down when asset prices go down with the lag, so, when asset prices go back up, probably, there will be a swing around there.”
He added: “Other things that get mentioned are things like apparel, and apparel prices were very low. There was a change in the methodology and another one is airfares. There are many little things.”
Producer price data released Thursday gives some backing to his view.
The Fed’s preferred inflation gauge, the PCE price index, uses some PPI data as an input.
PPI for airfare rose 2.9% during the month. For portfolio management, producer prices rose 5.3%. Hospital outpatient care prices jumped 1.3%.
“The data support the Fed chairman’s argument that some of the recent slowing in core PCE inflation was due to ‘transitory factors.’ That said, underlying trends are not showing significant strengthening or weakening,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics.
Paul Ashworth, chief U.S. economist at Capital Economics, said the current weakness in core inflation extends beyond these transitory factors. “We expect core PCE inflation to remain well below 2% for some time,” he said.
Yields on the 2-year Treasury TMUBMUSD02Y, -2.47% fell about 6 basis points on Thursday, showing that the market is concerned more about the apparent fragility in U.S.-Chinese trade talks than the new economic data.
Yields on the 10-year Treasury TMUBMUSD10Y, -1.72% fell 5 basis points to 2.44%, and U.S. stocks DJIA, -1.56% SPX, -1.29% COMP, -1.42% struggled on Thursday.
