Focus on the Right Inflation Data — Not Nightmare Scenarios

Markets are supposed to be forward-looking, so it’s a bit of a mystery that bonds sold off as dramatically as they did on evidence that bad first-quarter inflation was worse than previously understood. It’s tempting to brush it off as an overreaction to old news, but we still don’t know just how outdated it is.

As part of its broader report on gross domestic product, the Bureau of Economic Analysis said Thursday that a gauge of core personal consumption expenditures prices rose at a 3.7% annualized clip, the first quarterly acceleration in a year. That, in turn, sent yields on 10-year Treasury notes as high as 4.74%, the highest since Nov. 2, driven by the narrative that inflation is getting stuck at a level still well above the Federal Reserve’s 2% target.

The number, of course, added insult to injury. The closely watched monthly measures of personal consumption expenditures inflation had already indicated a hot January and February, and most signs suggest that March remained on the warm side (with the report due out Friday; economists forecast it rose 0.3% month-on-month.) But using deductive reasoning, the quarterly price index suggests that either March will come in higher than expected or January and February are due for upward revisions. The answer will matter tremendously for the direction of markets.

an inflationary quarter

Here’s how Inflation Insights LLC President Omair Sharif described the two potential scenarios (emphasis mine):