EUR 352.60 For Business Accounts Only

Quarterly Inflation Outlook (Q3, 2017)

Executive Summary

• Inflation isn’t dead.
• The rapid deceleration in core inflation that we have seen is caused largely by one-offs.
• Historically, the largest deceleration in core inflation we have seen since 1985 was a 1.87% deceleration in 1992; every deceleration of more than 1% since 1985 occurred during a recession that was already under way.
• Therefore, it is historically unlikely that these low readings will persist.
• Owners’ Equivalent Rent (OER) is merely returning to model; there is no sign of an extended deceleration in rental inflation.
• Inflation isn’t rising yet partly because rates (and therefore velocity) remain low.
• In Medical Care, pharma and hospital inflation are accelerating, while physicians’ services prices are declining. We present three alternative hypotheses to explain the shocking collapse in professional medical services inflation, each of which suggests the current level of Medical Care inflation is understated.
• New vehicle prices are declining relative to the CPI and we expect this to continue.
• The portfolio balance channel that supported markets when the Fed was building the balance sheet is equally likely to depress markets when the Fed starts shrinking the balance sheet.
• Momentum factor loadings have been unusually strong for a long time, and that has damaged many quant and value (and quant value) strategies that rely on “normal” factor loadings.