A warning sign: Inflation is going up
Yesterday the Core CPI Inflation data came up stronger than expected at 2.1%. This measure of inflation is very useful because it excludes the volatile categories of Food & Energy.
We have to monitor this index because, starting this month, the YoY number will exclude the big drop in price of March 2017 on the mobile phone category.
The Federal Reserve aims at a 2% inflation rate, so the odds that they will continue the pace of Fed Funds tightening is very high. In my opinion, we will have another hike in June to 2% and then perhaps another 2 hikes before the end of the year.
If this will materialize, a short term interest rate at 2.5% at the end of the year 2018 will not be accommodative any more and, de facto, the Financial Conditions may start to be a drag on the economy.
I am concerned, in particular, on the Auto Sales that in the last 8 years have been (I think) artificially inflated by this low Interest Rate Regime. I don't know if it is a coincidence, but as soon as the Federal Reserve started raising rates 2 years ago the Auto Sales stabilized as you can see in the chart below.
As a comparison, please take a look at the chart below which represent the 3 Month T-Bill Interest Rate. If you compare the 2 charts from 2016 to date, Interests Rates went up and, on the other side, Auto Sales have stabilized/decrease a bit.
What will happen with a normal interest rate regime of 2.5%-3% on the short end of the curve?
This has to be monitored during the next 12/18 Months.
We have to monitor this index because, starting this month, the YoY number will exclude the big drop in price of March 2017 on the mobile phone category.
The Federal Reserve aims at a 2% inflation rate, so the odds that they will continue the pace of Fed Funds tightening is very high. In my opinion, we will have another hike in June to 2% and then perhaps another 2 hikes before the end of the year.
If this will materialize, a short term interest rate at 2.5% at the end of the year 2018 will not be accommodative any more and, de facto, the Financial Conditions may start to be a drag on the economy.
I am concerned, in particular, on the Auto Sales that in the last 8 years have been (I think) artificially inflated by this low Interest Rate Regime. I don't know if it is a coincidence, but as soon as the Federal Reserve started raising rates 2 years ago the Auto Sales stabilized as you can see in the chart below.
As a comparison, please take a look at the chart below which represent the 3 Month T-Bill Interest Rate. If you compare the 2 charts from 2016 to date, Interests Rates went up and, on the other side, Auto Sales have stabilized/decrease a bit.
What will happen with a normal interest rate regime of 2.5%-3% on the short end of the curve?
This has to be monitored during the next 12/18 Months.
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