US: Muted inflation is not just because of distortions – ABN AMRO

Bill Diviney, senior economist at ABN AMRO, points out that the US core inflation surprised to the downside in March at 0.1% mom, below their and consensus forecasts of a 0.2% gain (unrounded, the miss was less dramatic, at 0.148%).

Key Quotes

“Much is being made of the drag from apparel, which fell 2.0% mom on the back of a methodological change to data collection – indeed, absent this drag, inflation would have been in line with estimates. However, we see muted inflationary pressure across the board in recent months.”

“More importantly for the outlook, core services inflation (i.e. excluding shelter and medical) remains remarkably stable at c.2% yoy, despite labour market tightness putting upward pressure on wage growth.”

“With productivity growth and profit margins relatively high, we think there is room for a further pickup in wage growth without accompanying cost-push inflation. This should keep the Fed comfortable with its current on-hold policy stance. We continue to expect no change to rates on our forecast horizon to end-2020.”