FOMC Day: Mar 15, 2017

On Feb 6 [see: The End Game] we were looking for CPI to reach 2.5% for January.   Going out on a limb (a 13.3% probability at the time) I also suggested that this report would prompt a FOMC rate increase.

The January CPI numbers coming out on Feb 15, even if massaged extensively, are likely to show a pickup in inflation – which had already tripled (from 0.7% to 2.1%) in the past two years in last month’s report.  My guess is at least 2.5%.

I think the… likely scenario is to raise rates in March (I know, I’m very much in the minority here — what else is new?) and let the dollar — and, thus the USDJPY — continue to appreciate while forcing a mini-crash in oil and gas.

As it turned out, CPI came in at 2.5% and included a massive 0.6% increase from December.  The culprit, as expected, energy prices.  Our thesis was, and remains, that rising energy prices — particularly gasoline — would unnerve the FOMC and other central banks who rely on “too-low” inflation to justify the most accommodative monetary policy in history a full eight years after the Great Financial Crisis.

We further reasoned that, with the February YoY inflation in gas prices being higher than the January one, The Feb CPI numbers would put even more pressure on central bankers and would result in even more pressure on oil/gas prices.  Two days ago [Whistling Past the Graveyard] I called for Feb CPI to come in at 2.7% or better based, largely, on back of the envelope calculations on gas prices.

As it turned out, 2.7% is exactly what we got.  The only problem is, it is accompanied by a decline in the Atlanta Fed’s GDPNow estimate for Q1 to 0.9% — not exactly a bullish situation.

From the EIA — the government agency tasked with tracking such things, we can see the average price of gas rose 32.5% between Feb 2016 and Feb 2017. It was a sharp increase from January’s 24% YoY increase.

February’s 2.7% CPI estimate looked like a very conservative bet unless other factors besides oil/gas offset their contribution.

The BLS just reported 2.7% YoY inflation for February.  It included a 1% decline in energy prices MoM, but a whopping 30.7% increase in gasoline prices YoY (versus a 20.3% increase reported in January.)

WTI is down almost 15% from its Jan 3 peak; so, oil’s mini-crash is well under way.  Is there more to come?  And, with CPI back to levels last seen in Feb 2012, what will this mean for FOMC policy?

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