Friday, April 15, 2011

Consumer price inflation is heating up


Today's release of March consumer price statistics was unsurprising to the market, with headline inflation coming in as expected (0.5%), and core inflation coming in a bit below expectations (0.1% vs. 0.2%). On a year-over-year basis, headline inflation was 2.7%, while core inflation was a mere 1.2%. Both measures are below their long-term averages. 


But looking under the surface, the news is not all that rosy. Over the past six months, the CPI has increased at a 4.7% annualized rate, well above its long-term average, and reminiscent of the heady inflation we experienced in the 2004-2007 period. Over the past three months, the CPI is up at a 6.1% annualized rate. It's thus quite likely that the year over year CPI figure will exceed its 30-yr average (3.1%) by a comfortable margin before this year is out.


Even the core CPI is showing some underlying acceleration, with prices up at a 2% annualized rate over the past three months, and a 1.4% annualized rate over the past six months. It is noteworthy that both the core and the headline rates of inflation are accelerating at the same time. If monetary policy were non-inflationary, then the strength in food and energy prices that are driving the headline inflation index higher would be offset by declines in non-food and energy prices. But that is not happening—all prices are accelerating. This confirms that monetary policy is in fact accommodative, and that is exactly what the Fed is trying to achieve. The Fed wants inflation to move higher, and they are getting their wish. There is every reason to believe that this will continue for at least the balance of this year, since monetary policy operates with a lag and the Fed has made no move yet to tilt policy in a restrictive direction.


Investors will be interested in the behavior of the non-seasonally-adjusted CPI, since the interest payment on TIPS (Treasury Inflation-Protected Securities) is based on changes in that measure of inflation, with a two-month lag. The chart above shows the 3-month annualized rate of change of the CPI (nsa). It also illustrates the seasonal tendencies in the CPI: inflation typically reaches a low point around the end of every year, then a high point around March-April of every year. As should be evident, the seasonal low last December was a good deal higher than it has been for most of the past decade, and the recent high is almost as strong as any we have seen in the past two decades. In the first quarter of this year, the raw CPI is up at a 8.1% annualized rate. This means that the inflation adjustment that TIPS receive will be unusually strong on an annualized basis over the next few months, and possibly for longer.


The ongoing rise in China's inflation rate is making headlines today, but U.S. inflation is not too far behind, as this chart shows. It's not surprising that inflation should be moving higher both in China and the U.S., since China has essentially outsourced its monetary policy to the U.S. Federal Reserve by pegging the yuan to the dollar. Chinese inflation is somewhat more volatile than ours, and that is also not surprising since its economy is smaller and less burdened by long-term supply and labor contracts. If China has an inflation problem, then so does the U.S. It will just take longer for the problem to become obvious in the U.S.

14 comments:

Benjamin said...

Idea: Number the Califia Beach charts, so we can argue about them.

Okay, look at chart #3. Really--what is about this chart that makes me deeply unworried about inflation? Indeed, one could call that chart as illustrating a victory against inflation.

Crickey, can we get some boomtimes in this economy, before we start worrying about inflation? We should have higher inflation for a few years as we dig our way out of a deep recession financial collapse.

Kelvin said...

If inflation is expected to accelerate, should one overweight commodities like energy, coal, gold etc. now?

NormanB said...

Y-Y core inflation is now at a measly 0.69% and has come down from its recent peak of 0.90% two months ago and is only 8 basis points above the low in Oct 2010.

Ergo, the FRB is going to keep buying Treasuries and printing money.

Maybe the rest of the world is worried about inflation but the FRB is worried about deflation.

Who is correct, do you think?

NormanB said...

Correction:

I stated that Y-Y core CPI for March 2011 was 0.69% but its 1.19%. Still pretty low but trending up. I still think the FRB is fighting deflation.

AdamSmith said...

Those who believe that you can't have runaway inflation with an output gap and high unemployment should reflect on Wiemar Germany,Argentina, Zimbabwe, etc. etc.

Benjamin said...

Adam Smith:

A 1 percent core inflation rate--by a measure many (both lefties and righties) say overstates inflation--is a long way from the Weimar Republic. I will keep a wheelbarrow handy, but my geess is I won't need it.

When Ronald Reagan left office, the great inflation fighter saw about 5 percent inflation.

Now, we are frightened by a 1 percent rate? Can we find a real problem to discuss?

honestcreditguy said...

I love coming here and reading Benjamin, he is a keynesian wet dream! Inflation is roaring as I stated here months ago...The fed is about as truthful as a kid stealing candy...

The fed can't see anything in front of them..They haven't for years..

I believe Benjamin is buried in his overpriced mcmansion that is worth little because the home game card is now played out. The sheeple are catching on, they are aware of the debtpushers. They destroy more lives than drugs, murder, smoking etc...

Until they indict the wall street clowns, this country will continue to boil..When the lid comes off get ready for an explosion of unrest.

Time to cleanse the system of its greed and rot...

Benjamin, next time don't listen to the fed when they tell you its just a subprime thing...They played you like a goldman sachs commodity call...

So easy to see bubbles. You just need to get down to the street, into the masses where the grease and oil of america live...

You are a shill that enjoys watching citizens become poorer, hungrier and more desperate..

that puts you on the dark side....

honestcreditguy said...

One more comment!

Inflation helps speculators, banks who are insolvent, deficient pension plans, credit abusers, debt pushers and wall street. The dark side.

Deflation helps prudent people, seniors, middle class and poor people, savers and regular average Joe citizens...

Public Library said...

I will say it again two years later. Bernanke has inflation baked into his DNA. Fasten your seat belts, inflation is coming to a community near you.

I plan to ask my local mechanic this week what the impact of shifting to lower grade gasoline has on an older car that is recommended to use premium.

Whatever it takes to thwart the banks depletion of the regular mans finances. I've already shifted savings account to places offering higher yielding accounts.

The race is starting to warm up. All of the worlds banks can't drop trillions in fiat currencies and expect nothing to happen.

There is nowhere left to hide now that the Fed is the worlds largest hedge fund.

Benjamin said...

I hope Honest Credit and Public Library are right, and we have a nice slug of inflation coming...we have been waiting, and waiting, and waiting...and no inflation, in fact we just got through a bout of deflation, ala Japan.

Actually, I am a monetarist, not a Keynesian. I favor monetary stimulus where appropriate, and balanced federal budgets.

I own property and stocks, and I want both to appreciate. So shoot me.

Benjamin said...

Dr. Perry just ran a good chart on wage growth--now at near-record lows, going abck to 1965.

Sheesh, when wages are increasing at nearly the lowest rate in the last 55 years, isn't all this hand-wringing about inflation badly misplaced?

What is the real impetus behind this? Is is anti-Obama-ism? I can't figure this one out.

honestcreditguy said...

come on benjamin...

wage inflation is not what were talking about here..

Were talking about everything you need to live on skyrocketing...

our corrupt govt. sold most people down the river with global arbitrage...

When will Holder go after GS...they wont...because greed and corruption is what the obliarchs of america back, along with wars to keep heroin flowing....

Benjamin said...

Honest Credit--

My point is this: If wages are flat; if housing affordability is at an all-time high; and if all kinds of commercial property are selling one-half of peaks (retail, industrial, office), than how serious is inflation?

As serious as Billy Barty trying out for the Lakers.

honestcreditguy said...

Deflation in things you don't need, inflation in the things you do.

Houses, commercial property, cars, flatscreen tv's, Ipads, Cruises etc are deflating because you can live without owning them...

Food, Gas, Water, Electricity, Insurance are inflating faster than a roadrunner....you need them as Acme instant grow food cant save us here...