Dormant Inflation Seen Giving Fed Time to Wait: Chart

The Federal Reserve may be able to take its time in adopting a more restrictive monetary policy because inflation is relatively tame, according to Pavilion Global Markets Ltd.

As the CHART OF THE DAY illustrates, the U.S. core consumer price index’s increase since the latest recession ended in June 2009 is the smallest for any multiyear recovery since the 1970s. The gauge of prices excluding food and energy rose 6.3 percent through April, according to the Labor Department.

“There is no pressure on inflation that could lead the Fed to act more quickly than it would like” in scaling back a bond-buying program and raising interest rates, Pierre Lapointe, the Montreal-based head of global strategy and research at Pavilion, and two colleagues wrote yesterday in a report.

Core consumer prices were 7 percent higher at the same point in the previous recovery, which started in December 2001, as the chart shows. The biggest increase in the inflation gauge was 29 percent, posted in a recovery that began in April 1975.

These and other inflation statistics are at odds with the magnitude of losses in U.S. bonds, according to David R. Kotok, chief investment officer at Cumberland Advisors. The decline in 10-year Treasury notes sent their yield surging 60 basis points from this year’s low, reached on May 2, through yesterday. Each basis point amounts to 0.01 percentage point.

“The bond-market adjustment is too extreme and has created bargains,” Kotok wrote. He added that Cumberland, a firm that’s based in Sarasota, Florida, is buying tax-free bonds and taking more interest-rate risk with its holdings.

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