Keep An Eye On CPI

If the Fed will indeed engage in QEII, than CPI is now the most important economic release. If CPI does not continue to show very low inflation than the Fed will have a tough time justifying their actions. I see numerous risks to CPI over the coming months:
  • Rents make up a disproportionate portion of the CPI and their are disparate stories across the country of landlords gaining the upper hand as more people choose to rent instead of buy.
  • The CRB keeps hitting new highs as many commodities are breaking out to multi year highs.
  • The dollar has been weakening and import prices have been rising.
  • The US is putting real pressure on the Chinese to weaken the yuan.
  • Airfares have been rising as the sector has seen consolidation. 
All these pressures are inflationary and if we do get a hot number than QEII might be in doubt. 


Anonymous said...

take a look at sugar.

PJ said...

Hi Tsachy,

I would like to believe this case as it might help my investments but:

1. The "rent" in CPI is owners equivalent rent, obtained through a survey of homeowners, and insofar as the flight from home ownership into renting makes homeowners more pessimistic, it might be expected to impact OER negatively.

2. CRB is high but it's more likely to be reflected in squeezed margins than in consumer price increases. Moreover, CRB is high due to demand in China and India which are at the peak of their stimulus-inflation cycles and are likely to drop into recession next year.

3. The dollar is volatile and has gone nowhere over longer time scales.

4. China will not weaken the yuan significantly.

I think the case for inflation remains weak.