Commentary
As the first round of the banking crisis fades, the market is refocusing on inflation and interest rate hike. Although U.S. inflation did come down, whether measured by consumer price index (CPI) or personal consumption expenditure (PCE), the year-over-year (YoY) downtrend was slow, and the month-over-month (MoM) decline was not persistent. For other advanced economies, the inflation downtrend is also uncertain, with some seeing rebounds in recent months. Against this backdrop, quite some central banks are cautious about ending tightening now.
For the time being, we confine our discussion to the U.S. as Fed’s decision is the most indicative and influential. Three quarters ago, overall YoY inflation was higher than the core one by two to three percent—depending on whether the CPI or broader PCE measure is used—but now the gap is only 0.5 percent (for both measures). Core CPI inflation came down slowly while core PCE inflation stayed flat over the recent four data releases, suggesting overall inflation might not easily move down quickly as overall inflation converges to the core one, probably what the Fed is suspecting….