Inflation Update

The monthly CPI report was released today and we had some bad news (if your a deflation-hawk…Great news if your an inflation-hawk). The monthly headline CPI report had the biggest decline in over three and a half years as it fell by 0.3%. Core inflation was actually up by 0.2%.  Headline inflation now stands for a 1.7% year-over-year (YoY) increase, while core inflation stands at a 2.3% YoY increase. Given that headline inflation is falling (been seeing disinflation since September 2011), and core is rising, there is probably some strength coming into a major part of the economy. Looks like its housing (rents?) and cars.

“The increase was led by higher costs of housing, new and used vehicles, medical care and airline tickets. Housing costs have risen eight months in a row and new autos four straight months.”

I personally do not think this gives the Federal Reserve ($FED) any room to act yet because core is rising. The fall in overall headline can be attributed to the major weakness in energy. The rise in core can possibly be the fact that the economy is showing some fundamental strength, or it can also mean that core has lagged and now is catching up. The trend for the next 2 months should be telling as I think energy prices stabilize here.

In fact, if you look at the Headline minus the Core inflation rate, it has gone negative for the first time since 2009 (It was negative in April too, but very negligible, so basically zero). If this disinflation trend continues, expect the $FED to ease (whatever that means) as they did in 2010 with QE2. That easing should probably boost inflation expectations  and cause another ‘asset-chase’ like it did in 2010-2011, but don’t expect it to do much for the real economy (in fact, it might even hurt it as real private sector net financial assets are taken away and energy prices spike).

CPI Y/Y % change (Headline-Core)

 

 

There is also the HA-CPI (Housing-Adjusted) index which is calculated by Cullen Roche over at Pragcap.com.  It has gone negative for the first time since late 2009 as well.

 

 

Tags: $CPI $FED $MACRO

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