Tag Archive for Inflation

Has inflation in the US bottomed out?

Breakeven[1]

Some analysts are beginning to suggest that inflation in the Unites States may have bottomed. As discussed earlier this years (see post), US inflation indicators were pointing to the lowest rate since 2009. Are the global disinflationary pressures going to push the rate of price increases in the US to new lows or have we hit the bottom?

First of all, what is the market telling us? Market expectations of future inflation remain subdued, with the so-called breakeven (implied from TIPS) rates still near the 3-year low.

5-year breakeven rate (source: Ycharts)

The situation with consumers is similar – inflation expectations remain low relative to historical data.

With expectations at the lows, why are some analysts calling the bottom on inflation in the US? Here are a few reasons:

1. Looks like producer prices are showing signs of life, as the latest PPI figure came in above expectations.

Source: Investing.com

The index has recently been changed to include a larger swath of the economy and it was those newer components which showed increases.

GS: – Headline producer prices rose 0.5% in March (vs. consensus +0.1%), while core prices rose 0.6% (vs. consensus +0.2%). The largest contributor to the unexpectedly large gain was trade margins—an implicit profit measure—which rose 1.4%. Within this category, there were large gains in flooring (+8.1%), chemicals (+4.7%), cleaning supplies (+4.0%), and apparel (+3.3%). The stronger March figures in this category followed a 1.0% decline in February, which pulled the core PPI down to -0.2%. The PPI for finished goods ex-food and energy—the “old” core PPI—rose a more typical 0.1%, consistent with subdued pipeline inflation.

Nevertheless this increase got some people thinking.

2. Today’s CPI increase was also firmer than expected (see story), a great deal of which was due to rising costs of shelter and food (not great for the US consumer).

3. In spite of the weakness in some commodity prices driven by China’s slowdown (see post), commodity indices are generally off the lows.

DJ UBS Commodity Index
CRB BLS Spot Commodity Index (source: Barchart)

In particular, the energy sector has come to life recently, with both gasoline and natural gas prices on the rise.

4. Some senior Fed officials are beginning to talk about inflation bottoming out (could of course be wishful thinking).

James Bullard: – “One thing you can say is that while inflation has drifted down … it kind of bottomed out in the past nine months, and I think it’s poised to go higher, back towards our target”

Given the data thus far, it’s difficult to make a reasonable projection at this point. With low inflation priced in however, any turnaround will take the markets by surprise.

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Low inflation creating a QE trap – Sober Look

Weak inflation readings in the US continue provide the Fed with the rationale to maintain securities purchases in what amounts to a “QE trap”. With the PCE inflation measure once again below one percent, the FOMC doves fear that “taper” could bring about deflationary pressures. The risk of course is that inflation measures remain benign and what was meant to be a short-term policy measure extends beyond anyone’s expectations.

Scotiabank: – The Fed’s preferred measure of inflation — the price deflator for total personal consumer expenditures — came in at +0.9% y/y in September. We feel that markets are underestimating the importance of this observation to the Fed. That is tied with April for the softest inflation reading since October 2009 when the US economy was just beginning to emerge from recession.

The forward looking inflation measure derived from TIPS yield (breakeven), has now also turned lower after what looked like a recent upward movement.

Similarly, we’ve seen a slump in commodity prices (see discussion), which is another signal of weak inflation readings.

With inflation measures remaining this low, many argue (see story) that there is no rush to begin exiting the current monetary policy. The fact that the US monetary base is now 4.5 times greater than it was 5 years ago and capital markets are now fully addicted to ongoing stimulus does not seem add any urgency for these economists. The longer this goes on, the more difficult will be the exit, making it harder for the Fed to pull the trigger. Welcome to the QE trap.

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