The Fed And The Markets Disagree On Inflation 

• The Financial Times – John Authers: Fed sides with reflationists as bond battle resumes
  US central bank sticks to view that inflation will quicken as bond market scepticism intensifies

  But it is perhaps more about a straight disagreement over incoming economic data, on which the Fed says it is dependent. The biggest fall in US bond yields this week came hours before the Fed’s announcement, with the release of US inflation data. Inflation, notably core inflation excluding food and fuel prices, fell. So did retail sales. Growth in average annual real wages slowed, to 0.6 per cent — labour is indeed managing to get a slightly better deal out of capital, after inflation, but not to the extent that would make anyone worry about inflation or brace for a great increase in consumption. Added to all this, oil prices dropped to a fresh low for the year, meaning that headline inflation — which matters most to politicians and consumers, if not central bankers — will fall further compared with previous expectations. This latest data package looks like a convincing argument that the great Reflation Trade, ignited by China early last year and given extra fuel by the strong surveys of economic confidence that followed the US election, can now be consigned to the dustbin of history. We should all go back to worrying about deflation.

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