Inflation came in low again. It will be interesting to see how this plays out over the next several months. In 2 years, there has been 1 single month with core inflation above 0.2% and no months with Core minus Shelter inflation above 0.2%.
In the past 8 months, core CPI has risen by about 1.0% and Core minus Shelter has risen by about 0.3%. Much of the Year-Over-Year inflation came more than 8 months ago. As we move to June, YOY core inflation and core minus shelter inflation will have strong headwinds to overcome as months 9 through 12 time out of the inflation measure. YOY Core inflation is very likely to still be well under 2% and core minus shelter well under 1%.
Shelter inflation has stabilized. Possibly if we are seeing the slightest whiff of a continuation in a housing recovery, this might slowly begin to decline. That will either pull core inflation down even more, or credit expansion in housing might lead to inflation in non-shelter core categories.
In any case, it seems as though the Fed will have to conjure up some pretty strong forward expectations in order to justify a rate hike in the coming summer. I'm just watching for now. I suspect that there will be a window where expected short term rate movements are at their lowest and where nascent recovery in mortgage markets haven't triggered bullish expectations yet. Maybe that point is now. Maybe it will be in June. At some point, there will be a profit in short forward Eurodollar contracts. I might very well sit on the sidelines too long and miss it. This is a tricky one.