More data on heated infaltion was the headline act. Scorching demand, next to no labour supply, surging asset prices, rising wages and inflation. We could go on. Yet, real U.S. policy rates are probing the lowest level ever seen in the postwar era, deeply in negative territory (see accompanying chart). That comes as the fed funds rate still sits at the lower bound, while headline inflation lurched higher again. Headline CPI inflation accelerated to 6.8% y/y in November, the fastest clip since 1982, when inflation was sliding down the mountain. Core inflation also accelerated, to 4.9% y/y, the strongest since 1991.
To be fair, we do see the inflation rate backing off over the course of the next year, which will naturally make this real rate less negative, but even a 3 ppt cut in headline CPI will leave real rates historically accommodative.
Another way to think about it: We have almost never seen inflation accelerate by this magnitude without an upward move in policy rates. The 2010-to-2012 period saw inflation jump briefly to 3.6% alongside a fully accommodative Fed, but to compare this circumstance with that deflationary credit event would be a clear mistake.
On that note, we look for the Fed to double its tapering pace next week, which will wind down the program by mid-March rather than mid-June next year. Why? To set the stage for rate hikes beginning in shortly thereafter.
|Table 1 - Market Performance|
|Source: BMO Economics, Bloomberg|