Monday, June 27, 2011

Inflation heats up (cont.)

The personal consumption deflator in May came in as expected at 0.2%, but the core version was a bit higher than expected at 0.3%. As this chart of the six-month annualized rate of change of each series shows, inflation is definitely picking up on the margin, regardless of how it's measured. So far this year the core PCE deflator is up at a 2.3% annualized pace. It's notable that both core and headline inflation are moving higher at the same time, since this confirms that monetary policy is definitely accommodative. If policy were tight, then higher oil prices would be pressuring other prices to decline, and we would be seeing core inflation falling while headline inflation was rising.

Inflation is now high enough to justify the Fed's decision to forego QE3, and high enough to begin to justify the concerns of those who worry that the Fed may have been too easy for too long. Deflation is dead, of that we can be sure.

UPDATE: The bond market responds to the news by steepening, sending sensitive, forward-looking inflation expectations higher.


Benjamin Cole said...

"So far this year the core PCE deflator is up at a 2.3% annualized pace."

With the GDP underperforming potential by 10 percent, I am supposed to be worried about 2.3 percent inflation?

The current obsession with very low inflation rates mystifies me. Is this being driven by bondholders?

Don't we need a long run of mild inflation to deleverage?

Kurt said...

I hope this question is relevant. I was listening to a well-known financial advice radio talk show over the weekend and the host stated his opinion that if it weren't for the stimulus package we would continue to be in a recession right now. I would like to know Scott's view on the matter. (My apologies if it has already been stated in past postings, but I'm not very good at digging through them.)

Scott Grannis said...

my opinion for a long time has been that the stimulus package was responsible for slowing down the recovery. Government spending wastes resources that could be put to better use by the private sector.

Bill said...

Kurt: I heard that also. It was Bob Brinker on Money Talk. I usually enjoy listening to him but I completely disagreed with his statement. The worst thing is he cited no statistics or any other evidence to bolster his position. He just made the conclusory statement that "without the stimulus we would have no economic growth right now". Of course I thought immediately of Scott's statements that the stimulus has hindered growth and I think the stats bear this out. Comparing this "recovery" with recoveries from other previous recessions shows that this recovery is stunted. I agree that government spending and policy is what is causing this and I challenge anyone to prove otherwise.

Benjamin Cole said...

The PCE deflator, minus food and energy, for 12 months ended 5/11 is 1.3 percent.

1.3 percent!

This is "heating up"?

Kurt said...

Bill: Yes, that is who I heard it from. I was trying to avoid saying his name explicitly in order to avoid embarrassing him. His advice, in general, is decent. But this case makes me wonder where he gets his data and/or opinions from.

TradingStrategyLetter - Weekly Summary said...

When the big time inflation is will be paralzing and mind numbing. When the media gets on board it will be far too late to react.