U.S. inflation: bursting through the core
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Economic forecasters, including those at the Federal Reserve, have notoriously poor aim. Last month, the central bank revised sharply lower its projections for U.S. gross domestic product in 2012 – just as U.S. data began to turn in a more positive direction.
But at least one Fed call appears to be on the mark: overall inflation is coming down as energy prices ease on the expectation of slowing global demand. This, in turn, may soon lead to a curious phenomenon. The core measure of costs, which excludes energy and food prices and tends to be lower than consumer prices as a whole, may soon exceed so-called “headline” inflation.
Eric Green at TD Securities, writes in a research note:
The November CPI data was benign and captures a trend over the next six months that will become more obvious – headline is poised to decelerate through core prices. Core inflation will prove more sticky to the upside rising toward 2.3% y/y over coming months while headline prices fall toward 1% y/y by May. That will encourage a perceptible bias lower in breakevens (one that could accelerate if Europe goes Kaboom in Q1), and it provides the Fed more leeway to become more proactive should growth decelerate over H1 as we suspect it will.
Jim Baird, chief investment strategist at Plante Moran Financial Advisors, offered a similar view.
The pace of inflation has clearly moderated in recent months, and is expected to continue to ease in the months ahead. Dissipating inflation pressures should also allow the Fed more room to provide additional stimulus if the economy were to slow in early in 2012. While recent economic data suggests solid fourth quarter results, there is certainly a risk that the sharp slowdown in Europe could be a drag on the U.S. economy as well.
When it comes to forecasting (and, Fed hawks might argue, in general), inflation really is the central bank’s core competency.
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The only thing that is keeping inflation in check is the continued drive among overseas suppliers (China, Mexico, et al) to supply US retailers with goods to make competitive sales targets. As demand goes down, with an almost certainly dissappointing consumer spending total for many sectors including durable goods, garments this holiday season, next years overseas purchasing will come up against a wall of dramatic price increases for almost everything, from goods to supply chain costs in all sectors in the area of 20%. That wholesale push will result in a dramatic shift to the upside on core inflation beginning with the summer seasonal spike in May, 2012. Look for 12-14% inflation on dollar purchases across the board within a 60 day period, followed by double current inflation rates in real terms spreading through the retail markets afterward without a commensurate increase in salaries and capital expense in the USA. Balance sheets for retailers will be fine with this, but intermediate suppliers and manufacturing will be squeezed badly. Car sales will plummet, causing almost irretreivable move away from two car family demographics in much of the Northeast USA that may become permanent.
i.e.: don’t speak too soon.