| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inflation: U.S. Consumer Price Index to drop in June
The US consumer price index rose significantly to 3.44% in May from a year ago and 0.2% from its April level. The increase was bang on target with my estimate. However, I believe that May’s figure on a year-ago basis approached a plateau in the current cycle. My analysis indicates that changes in the CPI inflation rate on a year-ago basis and especially CPI ex shelter are explained by changes in the oil price compared to a year ago. It is particularly evident since the end of 2006 where more than 94% of the direction of the CPI ex shelter is explained by the year-on-year absolute change in the price of crude oil. Sources: I-Net Bridge; Plexus Asset Management. Shelter’s weight of approximately 32.3% in the CPI and the one-month lag between the change in the oil price and CPI ex shelter inflation enables me to make a reasonably accurate forecast. The change in the oil price is a known factor while the only unknown factor is the shelter CPI. But with a more stable trend the shelter CPI inflation rate that can be expected is fairly reasonably assumed. Sources: Bureau of Labor; Plexus Asset Management. The year-on-year change in Light Louisiana Sweet crude in May was $41.53 per barrel. The historical relationship between the change in the Light Louisiana Sweet crude and the CPI ex shelter inflation rate points to a year-on-year CPI ex shelter inflation rate of 4.77% in June given the said lag. That makes up 67.7% of the overall CPI inflation rate (overall CPI minus the 32.3% weight of the shelter CPI) and will therefore be 3.23%. If I assume a year-on-year change of 1% in the shelter CPI, May’s total CPI will add up as follows: (67.7% of 4.77%) plus (32.3% of 1%) = 3.23% plus 0.32% = 3.55%. The 3.55% inflation rate means that the consumer price index will drop by 0.1% in June. The first decline since June last year! But where is CPI inflation heading? Without taking a stab at where the oil price is heading, I looked at three scenarios where the price per barrel of Louisiana Sweet crude was kept constant at $100, $115 (current) and $130 respectively for the next 12 months. The monthly oil price was then compared to the price a year ago and depicted against the CPI ex shelter inflation rate lagged by one month. Sources: Bureau of Labor; I-Net; Plexus Asset Management. By applying the historical regression equation the trend of future CPI ex shelter year-on-year inflation is as follows: Sources: Bureau of Labor; I-Net; Plexus Asset Management. Assuming that the year-on-year inflation rate for shelter remains steady at 1.0%, the outlook for the overall CPI inflation rate is as follows: Sources: Bureau of Labor; I-Net; Plexus Asset Management.
Sources: Bureau of Labor; I-Net; Plexus Asset Management. It is evident in the above that the US CPI inflation rate is likely to peak at 3.55% in June if the oil price maintains its current level or weaken. Even if the oil price spikes to $130 per barrel and maintains that level, the inflation rate will still top out in July this year. There may be a short further spike in September owing to a brief drop in the oil price in August last year. 2 comments to Inflation: U.S. Consumer Price Index to drop in JuneLeave a Reply | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Copyright © 2021 Investment Postcards from Cape Town - All Rights Reserved |
[…] Read full article… […]
Why in the world does anyone track the CPI? It’s a meaningless government statistic. If one is interested in tracking commodity prices, one should use a more meaningful index, such as the CRB index.