Source: Bloomberg. Fed’s target inflation rate Consumer Price Index Personal Consumption Expenditures (PCE) Index A REFLATIONARY ENVIRONMENT HAS BEEN EMERGING IN THE UNITED STATES January 2015 December 2016 YoY change (%) -0.5 0.0 0.5 1.0 1.5 2.0 2.5

  • After several years in which investors around the world feared inflation was too low, a reflationary environment seems to be emerging once again. Data released this week showed that inflation in the United States, as measured by the Consumer Price Index (CPI), climbed just above the Fed’s target inflation rate of 2.0% in December.1
  • Both headline CPI and core CPI, which strips out volatile food and energy prices, came in above the 2.0% mark.15 Rising prices for energy, rent and medical servcies were the main contributors over the year to the headline number.1
  • On Wednesday, the U.S. dollar reversed a Tuesday slide as investors digested the inflation data along with Yellen’s note in a San Francisco speech that “the economy is near maximum employment and inflation is moving toward our goal.”2
  • While investors appear to be preparing for a more active Federal Reserve in 2017 and beyond, it should be noted that the Personal Consumption Expenditures (PCE) Index, which is the Fed’s preferred measure of inflation, has been on the rise, but remains well below 2.0%.3
  • Further, Yellen also highlighted in her speech her view that it makes sense to “gradually reduce the level of monetary policy support” to the economy. Should the FOMC follow through on its own forecasts for 2017, the median projection for the target federal funds rate still rests at just 1.4%.4

1 Bureau of Labor Statistics,
2 Federal Reserve,
3 Bloomberg.
4 Federal Reserve,

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