expert comment
The inflation report for November, which was released on December 10th, triggered price fireworks. Prices in the US rose by 5% and more. The main reason for the rally was a positive surprise. Investors had expected an inflation rate of 7.3%. In fact, it ended up being just 7.1%.
It was the second month in a row that inflation was lower than expected. In early November I had about it berichtetthat inflation is likely to fall more sharply than many had expected. So far the calculation has worked, but whether the positive surprise will succeed a third time in a row is questionable.
If investors are surprised because the trend is stronger than expected, sooner or later expectations will be adjusted. An inflation rate of 6.5-6.6% is still expected for December, after standing at 7.1% in November (chart 1). A drop of 0.5-0.6 percentage points is impressive. Expectations have now been adjusted to the new trend.
In order for there to be an actual positive surprise, inflation should probably fall to 6.3% or 6.1%. That’s a high hurdle. Since inflation peaked in June, the data has been supported by oil prices. This tended to fall, so the monthly rate of change in prices was positively (downwardly) impacted. In the past few weeks, the price of oil has moved sideways.
Course fireworks on Thursday are anything but guaranteed. It’s not about whether inflation has fallen further. That’s almost certain. Rather, it is about whether expectations are exceeded. I have my doubts about that. I will not trade the event of the week, probably even the whole month of January.
Although unlikely, a negative surprise cannot be ruled out. Whether from 1974 to 1976 or from 1980 to 1983, no matter how strong the downward trend, the decline stagnates or reverses (chart 2).
Personally, I think the medium-term outlook is more exciting anyway. Every inflation stimulus that took the rate of inflation to at least 8% tended sooner or later to a second wave of inflation (Chart 3). No one should be surprised if inflation continues to fall for many more months.
What is important is what happens afterwards. There are no reliable forecasts in this regard. All we know is that the Fed has a great deal of respect, even fear, about a second wave. The key interest rate will be raised further, whatever is published on Thursday. And the key interest rate will remain at a high level, regardless of the fact that the inflation rate will continue to fall for many months.
Clemens Schmale
