U.K. inflation on the rise

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U.K. April CPI surprised on the upside, moving even further outside of the Bank of England’s (BoE) comfort zone. The annual inflation rate, as measured by headline consumer price growth, bounced to 4.5% in April from 4% in March, setting a new post-crisis high and the third highest reading since 1992.

The following comments come courtesy of BCA Research:

“Although we continue to believe U.K. inflationary pressures do not have deep roots, and expect that looming massive fiscal restraint will sweep them away, readings like today’s increase pressure on Governor Mervyn King to be seen as doing something to combat them. King’s resistance to rate hikes has been constant, but his resolution could be tested by increasingly restive elements of the BoE’s monetary policy committee (MPC). Stay tuned for signs that the internal pressure is picking up, but we continue to believe that investors should lean against expectations of imminent BoE tightening.”

Source: BCA Research – Daily Insights Service, May 19, 2011.

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Inflation data: actual vs. Fed’s forecast

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This post is a guest contribution by Asha Bangalore, vice president and economist at The Northern Trust  Company.

April inflation data point to an upward trend of both the all items Consumer Price Index (CPI) and the core CPI, which excludes food and energy (see Chart 1). The data suggest that in as much as the Fed views the recent gains in energy and other commodity prices as “transitory,” the level of concern could change fast if the economy gathers steam. In the three-months ended April 2011, the core CPI has risen at an annual rate of 6.2%.

The Fed publishes forecasts of the personal consumption expenditure (PCE) price index. The April projection shows a 2.1% – 2.8% increase in PCE inflation and 1.3%-1.6% core PCE inflation for 2011 on a Q4-to-Q4 basis. During the three months ended March, the PCE price index had risen at an annual rate of 4.7% and the core PCE recorded a 1.9% annualized gain. The Fe’s forecast implies expectations of a moderation of inflation in the months ahead.

As Chairman Bernanke pointed out in the press conference, if medium term inflation expectations are “unmoored” the Fed stands ready to take appropriate action. Market expectations of inflation remain well anchored, for now. Inflation expectations, as measured by the difference between the 5-year nominal U.S. Treasury-note yield and 5-year inflation protected security, stood at 2.15%, down from a high of 2.45% on April 29 (the week of Bernanke’s press conference). All said, actual inflation is trending up, while inflation expectations show a moderating trend.

Treasury security yields have moved down in the current environment of high energy prices, a downgrading of the U.S. economic outlook, and the nation moving close to debt limit. The 10-year Treasury note yield at 3.15%, as of this writing, is down from 3.75% on February 8, 2011 (see Chart 4). The downward trend of yields implies that economic conditions are not indicative of imminent inflation.

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, May, 16, 2011.

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Is U.S. inflation nearing a cyclical peak?

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The ISM PMIs for March indicate continued upward price pressures in the US economy. My GDP-weighted PMI (manufacturing and non-manufacturing combined) seems to indicate that the CPI inflation rate is heading for 4% in the coming months.

Sources: ISM; I-Net Bridge; Plexus Asset Management.

Since the last quarter of 2008, CPI inflation actually surprised on the downside as far as the GDP-weighted PMI is concerned.

I prefer the oil price as core indicator of US CPI inflation – and more specifically, the absolute change in the price of Louisiana Sweet crude compared to a year ago – above the GDP-weighted PMI for prices. The gap that opened between the change in the oil price and the CPI inflation rate since the end of 2009 is clearly visible.

Sources: I-Net Bridge; Plexus Asset Management.

The lower than normally expected inflation rate can be ascribed to the woes of the residential property market, though. Shelter’s weight in the CPI is approximately 32% and the impact of declining inflation and deflation on the overall CPI is evident in the following graph.

Sources: Bureau of Labor; Plexus Asset Management.

To me CPI ex shelter inflation is a better indication of how US citizens’ wallets are being affected. Even more important is the fact that most of CPI ex shelter inflation is explained by changes in the oil price. 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: Bureau of Labor; I-Net; Plexus Asset Management.

Sources: Bureau of Labor; I-Net; Plexus Asset Management.

But where is CPI inflation heading?

Continue reading Is U.S. inflation nearing a cyclical peak?

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Inflation: “Fed and government are out of control,” says Fleckenstein

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In this interview, Bill Fleckenstein of Fleckenstein Capital argues there is no such thing as good inflation and the Fed and government are out of control.

Source: Fox Business, April 15, 2011 (hat tip: The Big Picture).

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Debating inflation: Shilling vs Tamny

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In this video clip, Gary Shilling of A. Gary Shilling & Co. and John Tamny, editor of RealClearMarkets.com, debate inflation versus deflation. Shilling argues that a “speculative bubble” is driving up commodity prices, but Tamny regards that as “pure fantasy”. “When you see a broad spike in commodity prices that tells me it cannot be demand driven; that, in fact, it’s currency driven,” he said.

Source: Yahoo Finance – Tech Ticker, February 16, 2011.

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China inflation: Getting worse and coming to a Wal-Mart near you

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This post is a guest contribution by Dian Chu, market analyst, trader and author of the Economic Forecasts and Opinions blog.

On Tuesday Feb. 15, China reported its consumer prices (CPI) rose 4.9% year-over-year (yoy) in January, which came in less than expected. Economists were expecting 5.4% inflation, based on a Bloomberg survey.

However, after digesting the data, Asian markets closed mixed on that news, with China’s Shanghai Composite staying flat after a choppy trading session.

Well, the reason why markets reacted that way is because the lower figure is partly the beneficiary of a previously announced change–effective January 2011–in the weight of items included the CPI basket calculation.

Index Calculation Change

Food previously accounted for a third of the index calculation and was the main driver of inflation last year.  According to Blomberg, National Statistics Bureau (NSB) said that a reweighting of the CPI, including cutting the contribution from food, boosted the headline rate by 0.024%.

Bloomberg quoted Mizuho Securities Asia Ltd. saying that the CPI calculation shift effect is more like 0.2%. That is, without the change, the CPI may have been 5.1%.

Manwhile, NSB said the Producer Price Index (PPI) spiked 6.6% yoy in January after escalating at 5.9% in December.  The component calculation of the PPI also has been revised, including an addition of about 2000 products to the basket and adjusting the weightings.

The change reduced January’s yearly PPI inflation by 0.05%, which means the index would have seen an increase of 6.65% without the basket change.

Spilled Over to Non-food

Chinese statistic bureau did not disclose a breakdown of the basket for either index. So, the alterations made it quite impossible to directly compare the January data on an apple-to-apple basis to earlier months. Nevertheless, there are still plenty of clues.

First of all, it is evident that there’s now a broadening escalations spilled over to non-food items as well. Core inflation, stripped of food, rose 2.6% yoy, the highest in at least a decade after rising 2.1% yoy in December.

Residence costs jumped 6.8% from a year ago, the most since August 2008. Not to mention food prices soared 10.3% after rising 9.6% in December – Grain escalated 15.1%, fresh eggs climbed 20.2%, and fruit spiked 34.8% from a year ago, according to the official report.

Continue reading China inflation: Getting worse and coming to a Wal-Mart near you

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