About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Tuesday, November 23, 2010

Inflation Potential

Technically, the US is still in a price deflation phase. The CPI  is recovering from its 12/08
cyclical low, but is still 0.6% below the all-time high of 220.0 set during 7/08. It will not
likely surpass the prior peak until 2011.

The CPI for the past 12 months is up but 1.2%. A higher fuels bill for the nation has been
largely offset by a continuing deceleration of price pressure for all items less foods / fuels.

The weak CPI performance largely reflects the fact that the US utilization of capacity and
labor, although improving, is still well below levels seen at this point during most
economic recoveries. Business and labor have little pricing power in the current
environment.

The broad measure of inflation potential I use has basically been flat since late 2009
after a strong bounce over most of last year. My inflation pressure gauge, which gives a
large weight to commodities prices and is usually a better short range indicator than
broader measures, has risen sharply in recent months on higher fuel and basic food
ingredients. So far, however, there has been little or no pass through of the recent rise
in fuel and food prices to the full CPI measure.

The inflation pressure gauge is in a firm uptrend off its early 2009 cycle low and with
further economic recovery in store for 2011, there is likely to be some degree of
acceleration in the progress of the CPI next year. Since there will still likely be a
fair amount of slack in the US economy by year's end 2011, it would appear wise not
to expect more than a moderate uptick in yr / yr inflation readings next year. I know that
looking at 2010, the CPI is going to come in lower than I originally thought by a fair
margin.

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