Wednesday, June 18, 2014

Inflation Is Beating Expectations (excerpt)

Beating expectations recently has been the CPI inflation rate in the US. On a y/y basis, it rose to 2.1% during May, up from a recent low of 1.0% during October 2013. The core CPI inflation rate edged up to 2.0% from a recent low of 1.6% during February. That’s not much, but there was lots of buzz about it yesterday. Reflationists are starting to say, “we told you so.” Optimistic economists are saying that this confirms that economic growth is picking up since there is more pricing power. Pessimistic economists are warning that if price inflation continues to outpace wage inflation, eroding real incomes could depress the economy.

Where do I stand? I am in the middle, predicting that economic growth will stay moderate and that inflation will remain modest (or vice-versa). Admittedly, the core CPI inflation rate, on an annualized three-month basis, has been rising rapidly recently, from 1.4% in February to 1.8% in March to 2.2% in April to 2.8% in May.

Looking at the various components of the CPI shows that the recent flare-up in the core inflation rate has been relatively widespread. So there may be something to the reflation story, but we aren’t convinced just yet. In any event, we are feeling more comfortable with our 2.5%-3.0% range for the 10-year Treasury yield than we did on May 28 when the yield fell to the most recent low of 2.4%.

Meanwhile, the global inflation picture is mixed, but remains mostly subdued:

(1) OECD & G7. The core CPI inflation rate in the advanced economies of the OECD jumped to 2.0% y/y during April. It was just 1.4% a year ago. The same rate for the G7 major industrial economies also jumped to 1.8% from 1.2% a year ago.

(2) Eurozone. Of course, the Eurozone countries are in the OECD composite. Germany, France, and Italy are in the G7. Yet the region’s headline CPI inflation rate was only 0.5% in May. The core CPI inflation rate was only 0.7%.

(3) Emerging economies. The IMF tracks CPI headline inflation rates for both advanced and emerging economies. The former remained very low at 1.5% during April, while the latter edged up to 5.5% in March from 5.3% in February, with both rates the lowest since 2009.

Today's Morning Briefing: The Beat Goes On. (1) Forward earnings flying into the wild blue yonder. (2) Forward earnings is a great leading indicator except when it isn’t. (3) How mature is this expansion? (4) A striking difference. (5) Bears are going crazy over record-high profit margin. (6) Industry analysts doing it again. (7) Is inflation heating up in US? (8) Inflation is chilling in Eurozone. (More for subscribers.)

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