US consumer inflation data was surprisingly firm in March, raising the stakes for tomorrow’s April report . Another round of disappointing numbers would arguably confirm that the recent disinflation trend is in serious trouble. No one can rule out that possibility, but I’m expecting we’ll see disinflation will return in some degree.
Another factor that suggests that disinflation will continue: the lag effects of monetary policy, which have been relatively hawkish over the past two years. Consider how the year-over-year changes in broad M2 money supply compare with the 1-year change in core CPI. As the chart below suggests, the recent negative comparisons in M2 point to more disinflation ahead.
Finally, a simple model using unemployment and headline CPI continue to suggest that monetary policy is tight, which suggests that a disinflationary wind is still blowing.
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