The December consumer price inflation may have slightly overshot expectations but on Friday an economist underplayed the numbers and said pricing pressure could be a thing of the past.
What Happened: “Inflation is over,” said economist and Nobel laureate Paul Krugman in a New York Times opinion piece. The December consumer price inflation report was viewed by some as “evidence that disinflation has stalled,” while others found reasons for optimism, the economist said.
“Strange to say, the pessimistic takes generally came from the same people who warned a year ago that getting inflation down would be very hard and require high unemployment,” he said.
Referring to Friday’s producer price inflation report, Krugman said the number was “unanimously good.” The number, the economist said, is helpful to predict a third inflation measure, namely the personal consumption expenditures deflator, a monthly indicator that drives the Federal Reserve’s policy.
To make his case, Krugman said the two-year interest rate, which was hovering at 4.37% on Wednesday, pulled back to 4.14% on Friday in the aftermath of the producer price inflation data. The two-year yield is “largely an implicit prediction of Fed policy over the near term,” he said.
“It now looks as if the Fed’s preferred measure of underlying inflation will, if anything, be below the 2 percent target on a six-month basis,” Krugman said.
“It’ll take a while for the usual suspects to admit it, but inflation really looks like yesterday’s problem.”
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Why It’s Important: Krugman belongs to ”Team Transitory,” which believes inflation was the result of transitory factors and not a long-term trend. On the other hand, others believe the inflationary pressure could return back with a vengeance.
Gold bull and economist Peter Schiff said this week that the hotter-than-expected December inflation ”doesn’t mean that the Fed has to fight harder to win the inflation war, but that it’s already lost.”
Fears regarding inflationary pressure rising unabated drove the central bank to raise rates from near zero levels in early 2022 to a 22-year high of 5.25%-5.50% by 2023. As inflation pulled back from its summer 2022 highs, the Fed relented and began to pause.
Powell, along with other Fed speakers, has continued to assert that future monetary policy will hinge on inflation’s trajectory.
The iShares TIPS Bond ETF TIP, an exchange-traded fund that tracks the investment results of an index composed of inflation-protected U.S. Treasury bonds, ended Friday’s session up 0.43% at $107.79, according to Benzinga Pro data.
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