US Watch – What’s up with inflation?

Core inflation continues to disappoint to the downside, despite an apparently tight labour market. While some transitory factors are at work, and base effects should push core PCE back near the Fed’s 2% target by year-end… low unit labour cost growth makes it unlikely we will see a significant acceleration over the next 18 months. Prolonged subdued inflation is leading to inflation expectations becoming unanchored. Concern over this is one of the main reasons we expect the Fed to cut rates, regardless of the outcome of trade negotiations.