• Minutes from the March FOMC meeting revealed that the Fed is currently engaged in a healthy debate about inflation. According to the minutes, some members thought that recent gains in inflation “should not be overstated,” while others “commented that recent inflation data were stronger than they had expected.”1
  • Indeed, inflation has recently been moving up from its extraordinarily low point of recent years. The Consumer Price Index reached 2.7% in February 2017 while Personal Consumption Expenditures, the Fed’s preferred measure of inflation, has been climbing steadily since July 2016.2,3, It reached 2.1% in February 2017.3
  • While the upward trends have caught many investors’ attention, markets have taken the moves in stride. The U.S. Treasury yield curve, for example, has flattened slightly over the past month.4
  • Meanwhile, the market is betting on inflation remaining relatively tame over the coming 12 months. As the chart highlights, the probability that inflation will fall within a range of 1.5% to 2.5% in the next 12 months has climbed to its highest point since the global financial crisis.5
  • This is generally in line with a November 2016 assertion from a Cleveland Fed commentary, which looked at six models that have historically performed well at forecasting inflation. Five of the six models suggested that inflation was likely to remain at 2.0% or below through the next three years.

1 Federal Reserve, http://bit.ly/2nGwU8U.
2 U.S. Bureau of Labor Statistics, http://bit.ly/2oFx8Sp.
3 U.S. Bureau of Labor Statistics, http://bit.ly/1cR0IcA.
4 Bloomberg.
5 Federal Reserve Bank of St. Louis, http://bit.ly/2nICA2b.

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