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During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Stagflation Lite Getting Harder to Ignore


The cyclical downturn in U.S. economic growth that began more than a year ago remains intact, as shown by the year-over-year (yoy) growth rate of ECRI’s U.S. Coincident Index (USCI) – which subsumes the aggregate measures of output, employment, income and sales that define the business cycle. USCI growth has been in a clear downtrend since the beginning of 2015 (blue line).

Meanwhile, yoy growth in the core PCE deflator turned up last summer and remains near a three-year high (black line). Indeed, it is already approaching the Fed’s 2% inflation target. The Fed pays attention to this measure because it is thought to better capture the inflation trend, being free from more “transitory” influences like food and energy price inflation.

Nevertheless, Fed Chair Janet Yellen is wary of acknowledging a sustained rise in inflation, noting that, while “recent readings on inflation have moved up,” she had not “yet concluded that we have seen any significant uptick that will be lasting,” and expects the target to be reached only “over the next two or three years.”

However, with USCI growth in a cyclical downswing (thick blue arrow) for over a year, and core PCE inflation in a cyclical upturn (thick gray arrow) for more than half a year, these are no temporary blips.

The evidence shown in the chart vindicates our earlier call that the Fed was faced with “stagflation lite” (USCO Essentials, March 17, 2016). Given its dual mandate, this presents quite a policy conundrum for the Fed, especially in light of the U.S. Future Inflation Gauge hitting an eight-year high in its latest reading.

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