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Inflation is Cyclical

For a while now, the market’s been grappling with two issues – trade tensions and the Fed. ECRI’s cycle work speaks directly to the Fed debate.

We just got November PPI and CPI data, and yields on both two and 10-year treasuries – have moved up noticeably from their recent lows. 

What the Fed, and many in the market, don’t get is that inflation is cyclical, and that the inflation cycle doesn’t have to conform to the low jobless rate and higher wage growth.

Our chart shows the cyclical upswings and downswings in the inflation cycle:

Starting at the left side of the chart, the first upswing, marked off by a rising red arrow, follows the reflation call we made in the summer of 2016, when inflation expectations were near record lows, but really ramped up following ECRI’s call.

The second green arrow from the left shows the 2017 inflation cycle downturn, which ECRI saw coming, but Janet Yellen deemed the biggest puzzle of the year.

We then had a substantial inflation cycle upturn through this summer, when ECRI made our latest inflation cycle downturn call. Months later bond gurus were still pounding the table on rising rates and the bond bear market.

Sure enough, as the inflation cycle has turned down, the red down arrow on the right, and CPI and PPI inflation have dropped to ten- and 11-month lows, the market’s inflation expectations have plunged, so bond yields are well off their highs.

Today, ECRI’s leading indicators of inflation are telling us that this inflation cycle downturn is not over yet.

Click here to review ECRI’s recent track record.
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