- US inflation has undershot the Federal Reserve's 2% target for much of the recovery, but a stronger economy and the tax cut package have sparked fears of a sudden pick up.
- Inflation fears have driven bond yields higher and stock prices lower, reintroducing volatility into a market that hasn't seen much of it.
- JP Morgan's head of cross asset strategy, John Normand, crunches the numbers to show inflation has historically surprised investors, but consistently to the downside.
Inflation fears have been central to the shaken market confidence of the past few trading sessions, yet one strategist at JPMorgan (NYSE:JPM) is totally sanguine about the inflation risks facing the US economy.
John Normand, head of cross-asset strategy at JPMorgan uses a large sample of historical comparisons in inflation, core consumer prices, which exclude food and energy and are a favorite of central bankers, as well as wage growth as measured by average hourly earnings.
Normand’s message: There’s a pattern.
"Over the past two decades, inflation has surprised more to the downside than to the upside on all indicators," he writes in a research note.
Core CPI has met consensus forecasts "about 40% of the time since the late 1990s, exceeded expectations 26% of the time and undershot expectations 33% of the time."
Average hourly earnings met estimates 25% of the time, overshot 29%, and undershot 45%.
The market’s vertiginous plunge, which has since stabilized, first started last Friday after the market latched onto data showing a 2.9% spike in annualized average hourly earnings, the biggest gain since the recession.
Normand uses the following chart to show the combined trajectory of these key indicators for Federal Reserve policy — and to show inflation leery-investors are likely jumping the gun, and not for the first time.
"This underapreciation of disinflationary forces probably explains why the consensus has incorrectly forecast the direction of Treasury yields most years since the global financial crisis," he says.
US inflation has undershot the Fed's 2% target for much of the economic recovery despite an extended period of low interest rates and solid economic growth, in part because of stagnant underlying wages for most workers.