Fed President John Williams uses the analogy of an onion when describing inflation. For example, the outer most layer consists of commodities. The middle layers consists of goods. However, the inner most layer – its core – consists of services. And it’s services inflation which generates inflation inertia. And that’s the mechanic which the Fed are exclusively focused on…

There was a little of something for the bulls and the bears with December’s monthly inflation report. On the surface, inflation is coming down. However, if we look underneath the hood, most of that inflation is goods. Services inflation however remains doggedly high (i.e. wages). And whilst goods inflation could fall to “zero” – if services inflation remains twice the Fed’s 2.0% objective – they will continue to tighten (even if that means simply holding rates at a higher level)