Fed Chair candidates are falling over themselves to explain how inflation really isn’t 2.8% y/y, as it was in the most-recent PCE report. They’re stripping out rent and portfolio management fees and tariffs to say that inflation is basically on target.
“Tariffs are not a source of persistent inflation,” candidate Chris Waller said today.
This is clearly an attempt to make the appropriate dovish talking points to please Trump. Now whether that charade continues after they actually get the job is anyone’s guess but time will tell.
Of course, the one-off factors swing both ways and that’s something they’re completely ignoring. WTI crude oil is down 23% year-to-date. That’s a big drag on inflation that will continue for a while as lower crude prices filter through.
But it won’t continue forever. If you’re watching oil company budgets this month, they’re being trimmed. No one is making money at $55 WTI and that’s going to do what low oil prices always do — cure low prices. Global oil demand continues to rise and the OPEC excess production will be trimmed and oil prices will inevitably rise again.
Of course, when crude prices do go up again, the same trio of Fed candidates will be ultra-quick to exclude energy costs in the PCE calculation. That won’t be a good look.
Ultimately though, the scorecard is what happens on inflation. We’ve just gone through a period of high prices that were a reminder to everyone of the costs. They were extremely disruptive and led to the topping of virtually every elected Western government; it also eroded faith in money and central banks. Still, it’s largely seen as a pandemic one-off. A repeat would be exponentially-more damaging and would risk unmooring inflation expectations for a generation.
In addition, there are other bubbles that are being formed by inflation that will take many years to unwind.
The Fed is traditionally the thought-leader of global central banks but it’s not clear there are enough people left to fight off inflation. We are also dealing with the breakdown of the global trading system and disruption of AI
