Monday, April 29, 2013

Inflation & the Fed (excerpt)

Expected inflation in the 10-year TIPS yield has declined from a recent high of 2.59% on February 13 to 2.37% yesterday. The core PCED inflation rate fell in March to 1.1% y/y, the lowest since March 2011. I don’t understand why Fed officials are so convinced that lower inflation is a bad thing. They obviously view it as a sign of economic weakness. They also seem to fear that falling inflation will hurt demand for goods and services by eliminating buy-in-advance attitudes.

Are they aware that much of inflation’s recent improvement (IMHO) is attributable to health care costs? That’s right: The PCED medical care inflation rate was down to 1.7% in March, the lowest since April 1998. There have been significant drops in inflation rates for drugs and physician fees. Does the Fed want to see higher inflation rates in the health care industry so that people will rush to buy medical care goods and services before their prices go up?

Rent inflation has rebounded during the current economic recovery, but now shows signs of peaking. The CPI and PCED data are nearly identical and show that rent of shelter is up 2.2% y/y. It was actually falling during 2010. It accounts for 17% of the core PCED and 42% of the core CPI. Do Fed officials really want still higher rent inflation?

Today's Morning Briefing: Low Maintenance Bull. (1) A couple of simple wishes. (2) What’s charging up the bulls? (3) Hilsenrath says it all. (4) Disinflation making a comeback. (5) Why do they want more inflation? (6) Medical care inflation falling led by drugs and doctors. (7) Rent inflation peaking? (8) Hooray for Italy. (9) ECB set to ease. (10). No bank runs in euro zone money data. (11) Consumers still spending. (12) Focusing on fun-related Consumer Discretionary stocks. (More for subscribers.)

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