(Doug and friends now have one of my must-read blogs and I thoroughly recommend it ? link).
With inflation now massively undershooting the Fed?s own 2-2½% target range there is nothing to stop the Fed keeping their foot pressed down hard on the gas pedal. Indeed Jon Hilsenrath, the Fed deep-throat at the WSJ, reports that many Fed governors are more worried about inflation being too low than any future rise on the back of their QE ? link.
The rapid fall in core PCE inflation comes despite a recent sharp rise in unit labour costs, which most economists see as the primary driver of inflation. Indeed I wrote last month that I thought that this would exert a temporary, late-cycle upward pressure on core inflation. I was wrong. Clearly underlying deflationary pressures seem to be more entrenched than even I had thought. The bottom line is that with unit labour costs rising above rapidly falling core inflation, corporate profit margins
