BNY Capital Market Perspectives

Inflation’s Market Impact

Concerns over Inflation (or the lack thereof) have become a dominant theme in the markets. Weak price data started to emerge in early spring with negative monthly results that have caused both headline and core measurements of CPI and PCE to move away from the Fed’s 2% target. These measurements have yet to reverse in April and May data, with cheaper cell phone plans and slowing prescription drug costs as the most cited explanation for the declines. These broad cost categories have caused weakening inflation to be reported in both headline and core measures. Oil falling into bear market territory will undoubtedly complicate matters; with weaker headline reports likely to emerge before the end of summer. Balancing these concerns is the thought that changes to cell phone plan pricing is a one-time event, while overall drug pricing trends remain upward sloping. Additionally, the decline in oil prices is widely acknowledged as a supply side imbalance rather than a collapse in demand. Lastly, consumer survey measurements of inflation expectations, such as the University of Michigan indicate stable 2+% inflation expectations in both the short and intermediate term.

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