INFLATION UPDATE
Still no signs of inflation here. The latest reading from the BLS is showing continued signs of low inflation at both the headline and core level. The headline dropped to 2.3% from 2.6% while the core stayed at 2.3%. The headline figure is still being depressed by the big energy spike last year at this time. While energy dragged on the headline rate again this month, the effect from energy will be significantly reduced in the coming months. This is why I expect there to be little downside in the headline figure as we head into the summer months (barring a big decline in global economic growth, most likely due to China or Europe’s woes worsening).
Not surprisingly, the headline has reverted to the core as it tends to do. Despite all the mainstream media commentary about headline prices, these more volatile components have proven “transitory” as Dr. Bernanke predicted so long ago. Still, the core rate of 2.3% is above the Fed’s target of 2% and likely to keep the Fed at bay regarding further QE.
My housing adjusted CPI ticked down to a 1.1% year over year reading. Clearly, when adjusted for the depressed housing market, inflation is much weaker than the headlines say. This index has tended to be more volatile than the BLS figures over the last 20 years so it’s not surprising to see the figure we have today. Nonetheless, all of this is consistent with other independent readings on inflation which point to low inflation. So, the bottom line is, inflation is low and unlikely to spike higher any time soon even though I still believe we’re likely to see the CPI data trend higher as the year moves on. ”Higher” is a relative term though. Remember, the CPI has averaged about 3% over the last 50 years so a move from 2.3% towards 3% is hardly something to get worked up over….
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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12 Comments
I don’t entirely understand your “Housing Adjusted CPI”. Does it net out the housing component? If so, shouldn’t the 9% inflation seen from 2004-2006 actually be much lower if your netting out housing inflation?
Thanks
I am actually adding the monthly cost of a mortgage (on average) to the owners equivalent rent portion. From a purely economic perspective, the HA-CPI is using housing as consumption and not investment, which is kind of a no-no from a technical perspective, but I actually think this provides a broader understanding of the household balance sheet impact from broad prices since the mortgage is the most influential component on monthly spending. If you took the BLS figure from their owners equivalent rent then you didn’t even see much of an impact from housing in the inflation data during the bust. Likewise, in the run-up during the boom the HA-CPI showed a MUCH larger imbalance than the BLS data did. Had Ben been following my index he would have tightened the screws MUCH sooner than he did. In fact, he would have been talking about housing price imbalances as early as 2003….
Using just the payment of the mortgage is a distortion of the real cost of homeownership. One needs to add-in the cost of insurance, taxes, and maintenance. These are all costs covered by the rent one pays for a non-owner occupied housing unit.
Hey, nothing’s perfect!
Inflation will stay contained as long as the USD is strong, which will be the case as long as the rest of the world is an economic disaster zone.
Remember, the CPI has averaged about 3% over the last 50 years so a move from 2.3% towards 3% is hardly something to get worked up over…
Yeah, but I used to get a decent raise every year, now I’m just happy if I get anything.
“You are Correct”–Sir: No Inflation
Cullen – do you have any thoughts on the Gov’s April surplus? Specifically whether that’s backed into your algo and was cause for your sell call…. and even if not in your also, whether the surplus is related to the market sell off?
It was mostly due to tax receipts. April is always a big inflow month for the Tsy. I believe March was a record deficit. May will be interesting. My guess is we swing back to a big deficit again….
Algo is in cash and has been for a bit now. It’s turned out to be a very good call if you legged into the trade when initiated at 1320 or so. Was rough sailing there for a few weeks though….
Have another cup of Koolaid.
Koolaid? I think Cullen’s been drinking truth serum because he’s been more right than just about anyone on the inflation story over the last few years.
JH is drinking the kool-aid. Here’s proof to debunk Austerians/Austrians:
Oil/energy prices cause inflation, NOT federal deficits -evidence/facts here: http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/
2. http://www.RodgerMitchell.com Daily Economics Empirical EVIDENCE by CEO/MBA economist at http://rodgermmitchell.wordpress.com/2009/09/07/introduction/ & http://rodgermmitchell.wordpress.com/2011/07/09/why-bank-lending-leads-to-recessions-a-counter-intuitive-finding