Powered By Blogger

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 !!!

Sunday, March 17, 2013

Inflation Potential -- Shorter Term

As will be shown, the full CPI over the past decade has been heavily influenced by changes
in the price levels of foods and fuels. The boad CPI less food and fuels has been mild
over the past decade and has been in deceleration mode. Shorter run surges and retreats of
the full CPI have largely been determined by the food and fuels components, particularly
petroleum products. CPI Chart

As the chart above shows, a vigorous "V" recovery in production and operating rates starting
in 2009 turned a deflation environment into a sharp cyclical acceleration of inflation pressure
which culminated in a surge in the CPI measured yr/yr up to 3.9% in Sep. 2011. Note the
strong role played by the price of gasoline and the far broader CRB commodities composite
in driving the CPI up well into 2011. Motorfuel / CRB (bottom panel)

The CPI has been in deceleration mode since the autumn of 2011 on slow production growth,
a flattening out of capacity utilization % and a decline of commodites prices including even
petrol fuels. Note however how the seasonally strong surge of gasoline prices has turned the
full CPI back up this year.

I think the chances favor further and cyclical inflation pressure in 2013 on faster production
growth and higher operating rates coupled with a stronger services sector. This projection
is based very heavily on a positive response from the economy to the current major QE
program by the Fed and comes with an additional stipulation that QE if sustained will also
put some stronger financial player interest back into the commodities market.

Now if there is the usual positive economic response to QE 4, an acceleration of inflation
pressure will re-introduce two issues to think about: (1) If inflation does build too quickly,
it will put even more stress on household income, further undercut confidence, and increase
risk for the economy, especially given the low wage growth in evidence and, (2) Pressures
will rise on the Fed to curtail its QE commitment, provided particularly that the CPI,
excluding foods and fuels, moves up toward 2.5% yr/yr which could be a trigger point to
slice the QE program by the Fed's own admission. A couple of things to think about.    

     

No comments: