Friday, March 16, 2012

Consumer price inflation still moderate



Inflation according to the CPI remains moderate: no surprises. As the chart above shows, inflation is running in the 2-3% range, regardless of whether or not you include the contribution of energy prices. This level of inflation is very close to what we have seen over the past decade. For reference, on an annualized basis, the CPI is up 2.5% over the past two years; 2.4% over the past three years; 2.3% over the past 5 years; and 2.5% over the past 10 years.

There is nothing alarming about this level of inflation in any sense. No sign of a big inflation increase, and no threat of deflation either. The Fed has absolutely no need to engage in any further quantitative easing or easing of any variety. The Fed's next move will likely be to increase rates, but the timing of that move is unfortunately still shrouded in mystery. Recent action in the bond market (e.g., a 20 bps rise in 2-yr Treasury yields, and a 40 bps rise in 5-yr yields) suggests that the Fed will begin tightening sooner than was expected just a few months ago. I think it's reasonable to assume that we will see more of this action in the months to come.

6 comments:

Dr William J McKibbin said...

Dr Ben Bernanke and the Federal Resere deserve the credit for the current near zero levels of inflation -- hammering the remaining inflation out of the US economy is clearly the objective of the Fed at this point -- I expect near zero to negative inflation (deflation) to persist in the near-term -- baby-boomers will continue to sell their stock and rental properties to fund their retirements -- all this spells opportunity for those with cash to invest...

Public Library said...

The dollar is worth less today than it was just 10 short years ago. That is a bad thing anyway you slice it.

The Fed is a flawed institution/ideology.

Squire said...

Inflation is just another bailout.

I don't like 2.5% inflation because it is 5% in two years, 7.5% in three years, and 10% in four year.

Frozen in the North said...

Of course the whole inflation thing gets amusing when you consider the loud voices talking about hyperinflation at 'merica's doorstep. Turns out no so much, although maybe some day...

The feds deserve all the credit for low inflation (sorry McKibbin) insofar as they create the stock of cash, and money in general.

The Feds remain absolutely committed to saving the banks at the expense of everything else. Think stress test and Region Bank (which passed) and has in its balance sheet negative tangible net worth.

The Feds will continue the "easy money" until the banks are back in the black (sometime in the next 5/6 years). Unless the world gets fed up of lending to the US government -- unlikely if you consider their other options (Greece anyone?).

Finally, inflation will remain tame as long as wages remain tame; a service economy's most important cost is labor...

Dr William J McKibbin said...

@Frozen, you said, "the Feds remain absolutely committed to saving the banks at the expense of everything else." I totally agree. The question for me is how to exploit the current dismal economic situation along Main Street to make money personally. For most Americans (those without means or skills), the economic future is dark at best. My goal is to thrive in the current economic environment regardless of what happens to the US economy...

Benjamin said...

Worrying about inflation when the USA (and Europe) is coming out of the worst recession since the Great Depression is like worrying about getting your rugs soaked by firefighters saving your house.

The Fed needs to stimulate. Print a lot more money, frankly. Monetize debt through QE.

inflation is not a worry. Money is a medium of exchange, not a store of value.

So what, price are up several hundred percent from the late 1960s. Our standard of living is several times higher.

Japan has licked inflation, but the results have been an epic value for that nation. Industrial output down 20 percent, real wages down 15 percent in the last 20 years. Stock and real estate off by 75 percent and still property values are going down. The yen is strong, Big whoop.

India and China are printing lots of money and sporting terrific real growth figures and some inflation.

I am pragmatic, I like what works. If the gold standard would work, I would back that (it didn't and can't work and we had the Great Depression).

Moderate inflation is the lubricant to higher rates of real growth and solving the money illusion problem of wages (sticky wages).

I wil take robust real growth and moderate inflation anyway. Just give me the robust real growth and i will eat inflation for breakfast.