UBS Chief Economist Paul Donovan notes that US February CPI data predates recent market volatility but remains important for Federal Reserve policy. He expects underlying inflation pressures to be benign and argues central banks should only react to broad price increases. Donovan underlines that the Fed lacks tools to address isolated market disruptions such as potential Gulf shipping issues.

Benign CPI and Fed constraints

“US February CPI predates this volatility, but matters to policy. Underlying inflation pressures revealed by today’s data should be benign.”

“Central banks should react to general increases in prices—inflation—because that signals an imbalance in the economy. They lack the policy weapons to react single market issues. Fed Chair Powell can hardly order the FOMC to conduct mine sweeping operations in the Gulf.”

“The US affordability crisis is based on inflation perceptions, in turn dependent on high frequency purchases. “

“The near 27% increase in gasoline prices from January lows will not register in today’s data, but consumers will notice soaring prices for selected grocery items.”

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