Sticky Inflation? Or Sticking the Landing?

Headline CPI came in at expectations, core missed – and both show “acceleration.” The stock market is treating it as good news. Just five items out of 180 explain the entire month’s inflation. Core ex-OER is now below the Fed’s target for sixth months. If inflation is proving to be “sticky,” it is sticky below the Fed’s target. The deflation we have been predicting should have materialized by now, but so far it is restricted to the goods components of the CPI. Our model based on the money supply remains conceptually compelling and statistically robust, but it has failed to call deflation with the pinpoint accuracy with which it called the top in inflation. As the absolute magnitude of changes in M2 falls, even though the changes are negative, the model becomes more noisy. We think deflation would be good for growth, but markets fear it. So with the risk of deflation fading, no risk of resurgent inflation, and increasing comfort that the Fed is not very restrictive, there is a very strong background for stocks.