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The Fed Has A Problem: Inflation May Hit 3.5% By December Due To Gas Price "Base Effect"
Submitted by Tyler Durden on 05/26/2016 14:57 -0400

http://www.zerohedge.com/news/2016-05-26/fed-has-problem-inflation-may-hit-35-december-due-gas-price-base-effect

In short: the Fed suddenly has a problem. Here's why.

As BofA writes in a note today, the recovery in oil prices this year should lift headline CPI inflation, "confirming the transitory nature of the energy drag." What is startling, however, is that assuming BofA's gas price forecast is right, the bank calculates that its baseline forecast is for CPI to rise to 2.4% by year-end 2016 from the current 1.1% reading. This forecast uses futures prices for wholesale gasoline (RBOB) to estimate future energy prices.

Note that 2.4% CPI inflation in December is BofA's base case, based on an all too realistic gas price of $1.77/gallon retail ($1.41 wholesale). According to BofA's "bull case" in which gasoline returns to its historical price of $2.76/gallon ($2.06 wholesale) would more than triple headline inflation from its current 1.1% level to a whopping 3.5%: this would be a shock to the Fed, to inflation expectations, and to the market. It would also force the Fed to hike rates far faster than the market currently expects.

For all the math and the charts and more then click the link above...