We were just talking about how the wrongest prediction of the past 5 years was the call for “inflation” or “hyperinflation” due to aggressive monetary easing.
In his latest US Macro Dashboard note, Morgan Stanley economist Vincent Reinhart points out that the real story now is the return of deflation risk.
With evidence building that the Q2 soft patch is upon us, worrisome chatter about deflation is taking centre stage. Our outlook for some time has been that mounting fiscal drag would show through in Q2 most strongly as sequester effects take hold and a slowdown in global trade hits US shores. Indeed, another run of poor data this week has shown Spring growth may be dampened by weakness in manufacturing, increasing jobless claims, and a stalling housing recovery. The slowdown in activity is not helping the Fed with their consistently significant misses on the employment side of their mandate, but it now appears they may have to turn their attention to supporting inflation from the bottom.
While it’s well known that the Fed is far away on its employment target, it’s also now seeing its inflation target look increasingly perilous.