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Federal Reserve Chairman Jerome Powell has repeatedly cited that the Fed’s goal is to have the domestic inflation rate run at or close to a 2% annual rate as measured by PCE (Personal Consumption Expenditures Price Index). Through the first half of 2018, the Fed’s goal was in sight which prompted a series of interest rate hikes which were supported by strong underlying economic data. However, in mid-2018 the PCE began moving sharply lower and away from the Fed’s stated benchmark. What is not as clear, is why the inflation data has changed directions so quickly. The economic data remains strong, consumers are still confident, and interest rates are still at relatively low levels. All of these observations would tell us that inflation should be moving upwards. However, as the chart suggests, inflation has moved lower which is one of the reasons—along with marginally softer economic data—that the Fed has backed off raising rates in the near term. The Allegiant Private Advisors team will be paying close attention to the inflation data as we move through 2019, to see if the present catalysts begin to drive the inflation data back towards the target range.
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