Inflation: Shouts and Murmurs

Now that we know where football phenom Johnny Manziel will be calling signals in the fall (it’s Cleveland, for those of you whose lives don’t hinge on the outcome of the NFL Draft), we can all turn our attention back to whether or not the rumors since 2008 about inflation will finally be retired and a fresh assessment formulated. Looking to Washington, predictions that borrowing costs are about to rise owing to the Federal Reserve’s steady monthly reduction in its bond buying program remain unfulfilled. Long-term interest rates suggest no such trajectory…yet.

Another key component, of course, is CPI. New figures are set to be released today. When we consider various sources, it looks like average consumer price inflation will come in close to 0.8% this year, with 2015 estimates hovering around 1.3%. That’s an improvement over 1.11% in 2013 and 2.84% in 2012. That assumes an average oil price of $107 per barrel this year and $102 per barrel in 2015, as well as an average exchange rate of $1.38 per euro in 2014 and $1.39 in 2015.

Key to this scenario is the Fed sticking to its stated course of keeping short-term rates low for a meaningful interval after its bond purchase program is complete.

Unless we see an unexpected negative turn of the country’s economic outlook, we would expect the central bank to continue to winnow down the stimulus program in $10-billion tranches after every policy session. That pace would bring about a full unwinding by end of this year.

That said, persistent voices in the choir still trilling the threat of an interest rate spike are increasingly muffled by Fed pronouncements that it remains concerned about the labor market’s health and its broad commitment to fostering a more vigorous recovery. Of course, nothing prevents the central bank from upshifting its bond buying pace, if it deems necessary.

Only time will tell how well Johnny Manziel plays in Cleveland. But in terms of inflation, barring an unforeseen crisis, tepidness would seem to be the temperature to expect for the short term. Investors may want to reallocate and diversify appropriately.