I love this. The consensus expectations was for the core CPI to come in at 0.2% this month.
It came in at 0.253%, was rounded up to 0.3%, and the market is selling off on this.
Just remember, betting on monthly economic releases is a suckers game created by the bond and stock brokerage houses to generate volume. They take their cut if the market is up, or if the market is down. They just want volume.
But we are hearing a lot of noise about inflation and inflation expectations and with oil prices threatening $60 I’m even worried about inflation keeping consumer spending from bottoming.
But based on historic patterns, I’m not particularly worried about core inflation. As the following chart shows core inflation tends to moderate for one to two years after recessions end. Moreover, the chart shows that the typical pattern is for the peak core CPI reading to occur around the end of recessions. Yes, their are exceptions but this is the normal pattern.
Second, in a low inflation world firms tend to raise prices once a year, typically at the start of the year. The major exceptions are education, housing and autos that have a different seasonal pattern. But because of this very strong seasonal pattern over half of the annual increase in the not seasonally adjusted core CPI tends to occur in the first quarter of the year. Moreover, if the first quarter increase is less than (or greater than) the prior years’ first quarter increase then the annual change is generally less than ( or greater than) in the prior year. This year the NSA core CPI rose 1.170% as compared to 1.177% in 2008. This implies that their is little reason to worry about a surge in the core CPI this year.
I know that commodity prices are turning up, but that is not that unusual in the early stages of a recovery and is not inconsistent with my earlier observation that the core CPI tend to ease for one to two years into recoveries. One, industrial raw materials account for such a small share of the final costs of most items that rising commodity prices are not a consistent leading indicator of core CPI. Second the pop in commodity prices may just be an example of what I call the “echo effect” or the tendency of money managers and investors to buy what worked in the last bull market even though economic fundamentals have changed drastically and market leadership usually shift to some other sector in new bull markets. This commodity price pop is accompanied by rising raw material inventories, falling raw material backlogs and record low capacity utilization in the raw material sectors.