We Told You We'd Be Talking About Inflation...


At the end of last year, we wrote a post titled: Pretty Soon We Need To Talk About Inflation.


The argument was not that inflation was going to be a problem, or that the Fed needed to tighten rates, or anything like that.

It simply pointed out that since the crisis, there's been no legitimate reason to even be discussing inflation, since there wasn't any. But that that was about to change.

And indeed, here in 2014, there are indeed a lot of people talking about inflation.

Morgan Stanley's Vincent Reinhart writes in a recent note:


Our analysis also suggests that we've passed the lows and will see a gradual inflection higher in core inflation back towards the Fed's 2% target through 2015. Since the fall of 2012, the Fed has been communicating that the appropriate timing for the first rate hike will be around mid-2015. That expectation has been predicated on the assumption that inflation will move gradually, and convincingly, toward its 2% goal. The fact that we are likely on the cusp of seeing the Fed's expectation for inflation play out should have no bearing on the FOMC's forward guidance - a forecast coming true is not a reason to change the forecast.

Last Thursday, Wells Fargo wrote:

The debate over how much slack remains in the labor market is heating up within the FOMC. Where participants' views currently lie and how they evolve in the coming months will shape members' outlooks for the two sides of the Fed's mandate and, by default, the timing of when to raise interest rates. Fed Chair Janet Yellen has emphasized a range of data indicative of labor market slack beyond the traditional measure of the unemployment rate. In this note, we review many of the alternative data points that have formed what is frequently being cited as Chair Yellen's "dashboard." On a level basis, we agree with Chair Yellen that there remains a "considerable degree of slack" in the labor market, but recent trends amid a few key indicators point to a strengthening in wage growth in the not-so-distant future.

Last Week, Deutsch Bank's Torsten Slok sent clients this chart, indicating that the Fed would soon need to hike its inflation outlook:

image001 (1)

Deutsche Bank


And on that same theme, this chart from BNP says the same thing about wages (via @barnejek)

wage inflation


Bottom line: Inflation isn't a problem. But the chatter has grown quite a bit, extending well beyond the hyperinflation chicken-littles who dominated the discussion over the past several years.