PCE Validates our StagDeflation Call

Core PCE printed cool at .1% and declined to 2.5% year over year.  Core PCE continues to be elevated by the flawed shelter component estimate which is purposely delayed by 6 months and further lags market rents as the BLS uses renewing rents.  PCE Core-R, adjusted to use market rents, is at the Fed’s arbitrarily low 2% target.  We continue to think that tariffs will not have a material impact on inflation as the decline in oil prices will offset any impact from tariffs.  Moreover, tariffs impact on inflation should be treated as one-time and ignored for the purpose of formulating monetary policy.

We continue to forecast that we are entering into StagDeflation as the key endogenous variables (independent variables) that predict inflation are growth in the money supply and to a lesser degree, oil prices.  The Fed continues to believe in the discredited “expectations” theory of inflation, which is why they are unwilling to cut rates in the face of a slowing economy and rapidly declining inflation.  The “expectations” theory of inflation is no longer relevant as individuals no longer have market power to negotiate wages as unionization has declined dramatically over the last 30 years.  We believe that the incompetent Fed will figure out that it needs to cut in the second half of the year as the employment market continues to slow.

We continue to be bullish on both the stock and bond markets with a 6,600 target on the S&P 500 Index and a 3.75% target on the US 10-year bond.