Current inflation details for the Fed

Detail-based factors… The details of the PCE, the inflation indicator handled by the Fed, will again require us to focus on quality rather than numbers. In the inflation plane after the May and June periods, if we follow the effect of the increase in the items that are driven by the demand, such as services inflation, rather than the items that will fall immediately when the geopolitical developments or the supply chain return to normal, a critical route will be followed in terms of the tightening process.

Components of inflation… With the steady decline in the demand for durable goods, which was strengthened by the epidemic, the weight of goods inflation in CPI seems to be decreasing. The effect here seems to have left its place to strong services inflation. With the ease of pandemic conditions, demand will shift to services, and there will be a moderation in goods prices, especially second-hand vehicles. One of the items directly affected by demand is housing and rent inflation. Housing inflation is still on the rise, but the rise in mortgage rates will outline the market cooling.

Core PCE inflation, 10-year bond yields and December 2022 FOMC rate pricing comparison. Source: Bloomberg

Conclusion? There will be fewer delays for basic needs in the coming months; Food prices continue to rise and geopolitical risks will remain an upside risk to energy costs this summer. Core inflation trends, on the other hand, will be critical to see the trend, excluding food and energy, which have high externalities. If the Fed sees a slowdown in these indicators, it will relax a bit. 10-year yields are still lower than the May meeting.

The possibility of the Fed waiting like September is also being evaluated. Fed policy rate expectations will be discussed in terms of economic development and risk perception. The fact that will shape this will be the qualitative details of inflation. The Fed prefers to act fast, not only in a supply-driven inflation, but in a platform where demand is added to supply very seriously and it can reduce inflation by curbing consumption.

Kaynak:Tera Yatırım

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