Inflation Update – Deflation, Inflation or Disinflation?

This morning’s CPI figure from the BLS showed another decline in the annual rate of change for consumer prices.   Prices rose just 1.6% year over year at the headline rate while core inflation rate was 1.9% (ex-food and energy).

It might help to put some of this data into perspective.  First of all, the CPI is being weighed on by the transportation portion of the index.  This is heavily influenced by energy which was down 1.7% this month.  This is likely to change in the quarters going forward as the year over year comps will begin to reflect substantial declines in gas prices in Q2 2012.

My other concern about the low stated rate of inflation is the improvement in housing.  Housing’s depression has been a hugely deflationary force for the broader economy.  That has shifted to a more inflationary position.  I adjust the CPI to reflect for this change in the Orcam Housing Adjusted Price Index which you’ll see below.  The current divergence is growing substantial as the OHAPI shows a 2.8% year over year increase and the CPI data shows just a 1.6% change.  The BLS reports housing at just a 1.8% year over year change while broader home price indices are reporting as high as 8% year over year changes.  I think consumers are much more likely feeling something closer to the OHAPI than the CPI data.  At worst, the core inflation rate of 1.9% much more accurately represents actual prices.

Going forward, I would expect upward pressure on prices.  Housing will likely continue to flow through at a positive rate of change and energy prices will continue to have their broad influence on the index with comps becoming much easier in the quarters ahead.  Given the unusual seasonal strength in energy prices this year we’re likely to see higher prices this summer though that might not be reflected in the CPI data for another quarter or so.



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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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  1. The most visible form of inflation is gas prices because they are so widely advertised.

    Rightly or wrongly from a perception point of view when gas goes from $1.80 or so to near $4 in about 4 years and we have virtually no inflation according to the official stats, Joe sixpack gets cynical. Especially when food prices have followed suit since they are so connected to the price of energy.

    Owner’s equivalent rent isn’t the type of thing most people think about when they think about inflation :)

  2. I still don’t understand the rationale for owners equivalent rent. I guess maybe they don’t like how it would hurt real growth prospects? Or they just find it counterproductive from the view of policy? Just eyeballing that chart I see high inflation in the early 2000s. Maybe if the Fed had been run by a certain someone tracking the Orcam Index we would have gotten ahead of the housing bubble faster than we did?

  3. Disinflation is a declining rate of inflation. So, last month’s CPI came in at 1.7% yoy and this month’s was 1.6%. So the rate disinflated month over month even though there was technical inflation year over year.

  4. It’s the whole investment versus consumption thing. But there are components of consumption and investment in housing which is why I adjust it. It’s not as clear cut as being able to just ignore housing prices entirely because you get a skewed perspective of the actual impact on consumer balance sheets in the interim.

  5. I’m firmly in the Gary Schilling side. Deleveraging has a lot to go and this is deflationary. At the same time at least in the US, natural gas was so cheap to help keeping down production costs, so another deflationary force but this is going to an end because nat gas price is well below production cost. Robotics and automation will kill a lot of jobs everywhere, not just in the west but in China too. In the long term 3D printing will probably kill even more jobs while creating a minority of very well payed new jobs for techies. What will happen ? I think there is a lot of noise but on the medium to long term, I believe we will see deflation in wages and inflation on energy and food. What a wonderful world !

  6. Cullen, can you explain what you mean here?
    “At worst, the core inflation rate of 1.9% much more accurately represents actual prices.”

  7. I’m saying the core rate is probably more indicative of reality than the headline. But honestly, real life probably feels more like my index….

  8. Purely non-scientific but to me the economy feels like it is starting to get traction, if true inflation is a given. As is the upward bias of us humans and monetary/fiscal prodding.

  9. So? CPI does. The two methods come up with very similar numbers, consistently.

  10. Cullen,

    How much of a risk do you foresee the rising inflation being for consumer spending? Combined with the payroll tax increase and potential sequester, the risks for the economy would appear to be rising.