I will leave the analysis of the CPI to other and just discuss some of the implications.
First, this caused my Fed policy index to turn positive for the first time since 2008. This index is a form of a Taylor Rule but it gives inflation and the unemployment rate an equal weight as compared to most versions of the Taylor Rule that give inflation roughly double the weight of unemployment or growth. But this implies hat the Fed should allow QE 2 to expire this spring. Moreover, it raises a real possibility that the Fed may raise feds funds in the second half of the year.
Second, I will look at the not seasonally adjusted (NSA) core CPI. In a low inflation environment firms tend to raise prices once a year, typically at the start of the year. As a consequence in the NSA core CPI over half the annual increase occurs in the first quarter of the year.
The third quarter pop stems largely from tuition, home owners equivalent rent and new car prices.
In the first quarter of 2011 the NSA core CPI rose 0.852% as compared to 0.469% in 2010.
This is the first time since 2004 that the NSA core CPI was higher than in the prior year.
If the average that some 55% of the annual increase occurs in the first quarter holds this year it implies that in 2011 the December to December increase in the core CPI will be about 1.55% or about doulbe the 2010 gain.
In the short run, however rising inflation is creating problems for the consumer. In March the year over year change in real average hourly earnings fell to -1.0% and real weekly wage growth turned negative. This weakness in real wages is showing up in the economic data.
For example, in March nominal retail sales rose 0.4%. But most of this was gasoline and excluding service station sales, nominal retail sales only rose 0.1%. This CPI report strongly implies that real retail sales actually fell in March. This means that in the first quarter real consumer spending is ending on a very weak note — one reason forecasters were optimistic about first quarter growth three months age was that the fourth quarter ended on a strong note. Moreover, the second quarter will be when the biggest impact of the disruptions to the supply chain from the Japanese disaster will occur. So the standard thinking that growth will rebound in the second quarter is questionable.