Fed is far from falling behind the curve – Deutsche Bank

According to the analysts at Deutsche Bank, the annual growth rate of the core PCE deflator, the Fed's preferred inflation metric, has risen from a recent trough of 1.3% (July 2015) to 1.7% as of January and they expect core PCE inflation to hit 2.0% by year end, which is a couple of tenths above the Fed's 1.8% 2017 forecast.

Key Quotes

“However, we doubt that such modest outperformance will raise concerns among monetary policymakers that they may be at risk of losing their credibility on inflation. To be sure, both market- and survey-based inflation expectations remain well anchored and are still meaningfully below their pre-crisis levels.”

“Another reason the Fed is unlikely to signal a more hawkish inflation outlook is that the recent firming in core inflation measures has been mainly due to only a few categories. Of the 43-bp improvement in the annual growth rate of the core PCE deflator since July 2015, healthcare and core nondurable goods have been the largest contributors.”