18 Dec 2014
Why the Fed may underestimate disinflation - Rabobank
FXStreet (Guatemala) - Analysts at Rabobank noted the FOMC earlier and CPI results and puts question marks to the FOMC’s outlook for 2015 inflation prospects.
Key Quotes:
“Earlier today, US consumer price inflation plunged to 1.3% year-on-year in November (as measured by the CPI) from 1.7% in October, driven by a 3.8% drop in energy prices (year-on-year). Unless we see a rapid rebound in oil prices, our econometric model predicts a further drop in inflation below 1.0% in the coming months”.
“However, the Fed still thinks that the disinflationary pressures are ‘transitory’. However, we would like to point out that there are several ways in which disinflation may be longer lasting”.
“In the first place, the excess supply in the oil market is caused by the spectacular rise in US shale oil production. While lower oil prices reduce the incentive to invest in new exploration, this effect may take some time and meanwhile US supply will continue to increase”.
“In the second place, it is still unclear how long the oil price war started by Saudi Arabia, which may not only be targeted at US shale oil producers, is going to last”.
“Moreover, as gasoline prices remain low, this could drag down inflation expectations. Consumers may not make the distinction between core inflation and (food and) energy prices as the Fed does. When inflation expectations fall this will also lead to a decline in core inflation”.
“What’s more, the fall in oil prices is not simply a supply side phenomenon. The slowdown of the global economy is playing an important role as well. After all, oil is not the only commodity experiencing price declines. The slowdown in world aggregate demand for goods and services, including those made in the US, may have a more sustained disinflationary impact”.
“Finally, the collapse in oil prices is also a threat to financial stability. This is most evident for Russia, but other oil exporters whose ‘business models’ are heavily dependent on oil are hurting as well”.
“All’n all, we see considerable downside risks to the Fed’s inflation outlook. Consequently, we remain doubtful of a mid-2015 rate hike and stick to our 2015Q4 call. Note also that the composition of voting members will change in January with a reduced number of hawks”.
Key Quotes:
“Earlier today, US consumer price inflation plunged to 1.3% year-on-year in November (as measured by the CPI) from 1.7% in October, driven by a 3.8% drop in energy prices (year-on-year). Unless we see a rapid rebound in oil prices, our econometric model predicts a further drop in inflation below 1.0% in the coming months”.
“However, the Fed still thinks that the disinflationary pressures are ‘transitory’. However, we would like to point out that there are several ways in which disinflation may be longer lasting”.
“In the first place, the excess supply in the oil market is caused by the spectacular rise in US shale oil production. While lower oil prices reduce the incentive to invest in new exploration, this effect may take some time and meanwhile US supply will continue to increase”.
“In the second place, it is still unclear how long the oil price war started by Saudi Arabia, which may not only be targeted at US shale oil producers, is going to last”.
“Moreover, as gasoline prices remain low, this could drag down inflation expectations. Consumers may not make the distinction between core inflation and (food and) energy prices as the Fed does. When inflation expectations fall this will also lead to a decline in core inflation”.
“What’s more, the fall in oil prices is not simply a supply side phenomenon. The slowdown of the global economy is playing an important role as well. After all, oil is not the only commodity experiencing price declines. The slowdown in world aggregate demand for goods and services, including those made in the US, may have a more sustained disinflationary impact”.
“Finally, the collapse in oil prices is also a threat to financial stability. This is most evident for Russia, but other oil exporters whose ‘business models’ are heavily dependent on oil are hurting as well”.
“All’n all, we see considerable downside risks to the Fed’s inflation outlook. Consequently, we remain doubtful of a mid-2015 rate hike and stick to our 2015Q4 call. Note also that the composition of voting members will change in January with a reduced number of hawks”.