Daily update

  • US inflation has fallen this year. A lot of this is due to the fantasy owners’ equivalent rent price, which no one pays. Declining fantasy prices do not help consumers’ spending power. However, rightly or wrongly (the answer is “wrongly”), Fed Chair Powell pays attention to inflation measures including OER. If rates were raised on a fantasy, they should be cut on a fantasy—and we see a rate cut today.
  • The Fed was late in reducing rates this year. Having caught up with itself, the Fed can indulge in a slower pace of rate cuts next year. President-elect Trump’s seeming determination to impose significant sales taxes on US consumers adds uncertainty. The Fed should ignore first-round tariff effects on inflation, but respond if second-round effects (lower competition, profit-led inflation) emerge.
  • The UK also has a fantasy housing measure in its inflation, which pushed up November prices. Input producer prices (and prices in shops) remain in deflation. That should allow the Bank of England to lower rates next year, at a cautious pace.
  • ECB Chief Economist Lane speaks, but investors are unlikely to react. Final Eurozone consumer price inflation almost never changes from the initial release and is not a focus.
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