We are still quite surprised at the extent to which Fed Chair Janet Yellen attempted to play down the inflation picture at last week’s Fed meeting. Inflation expectations were not really revised at all in the latest round of projections, with the key takeaway being that inflation through to 2016 is expected to remain below the Fed’s target of 2%.

This is despite CPI in the United States currently running at 2.1%. Chair Yellen spoke on CPI during the press conference and said that “the CPI index has been a bit on the high side, but I think the data that we’re seeing is noisy”. This lack of a normalizing inflation expectation leads to a lack of a normalizing of monetary policy and hence the USD weakness since the meeting.

As we all know, CPI is not the preferred measure of inflation for the Federal Reserve. That would be PCE – Personal Consumption Expenditure – which ahead of Thursday’s latest release is running at 1.4%. We are not advocating that rates should be rising in the United States at the moment but we believe that the plan to shake off investors and lean on low inflation expectations to maintain current rate expectations creates risks similar to that being seen in the UK; a central bank that is rowing back on recent dovish chatter in an attempt to quell a bubble in housing.

As it currently stands, the pace of increases in PCE on a month by month basis since the beginning of the year would see the 2% target hit by January 2015. Some Fed members, namely Chicago Fed President Charles Evans and San Francisco Fed President John Williams, have argued that the Federal Reserve should allow inflation to run up above 2% before raising rates in a bid to support labor market gains. Fine; but do not suggest that the increases in GDP and the improvements in the jobless rates that you are forecasting will not cause inflation to tick higher.

The PCE measure is due on Thursday at 08.30 Eastern and we expect to have seen the figure rise to 1.6% in the past 12 months.