Replies to post #79592 on ajtj99's Market Pulse

[stkboy1]

Who's Afraid of Inflation?

Is it all over? Is the Fed finally ready to pause or even stop in its rate-hiking pursuits? Maybe. And maybe not. Before we close for the day, there are a few more statistics we need to look at.

Contrary to rumors, inflation is not yet dead. The latest data released May 17 shows inflation to be running at 3.55%. "Core" inflation, which is inflation without food or energy, is 2.3%. However you slice it, that is above the Fed's comfort zone.

The problem is that most of the growth in inflation has been since the first of the year. If you take the first four months of 2006 and annualize core inflation, it is hovering around 5%. Total inflation on the same annualized basis would be over 7%. These are not trends that a central banker likes to see on his watch, let alone a new Fed chairman who has yet to prove his inflation-fighting mettle.

Why has inflation risen so much of late? Part of it is how they calculate the housing component. Rather than use actual housing prices, they use "equivalent rent." VERY roughly speaking, since fewer people can afford to buy homes, we are seeing more people rent and apartment vacancies drop. This means the rent people pay is actually rising. Since this is 39% of the CPI, it makes a difference. Look at this chart from Gary Shilling (www.agaryshilling.com):
Gary notes that the Fed's favorite inflation indicator, the personal consumption deflator, uses housing prices and not equivalent rents and thus did not spike in April. But it is still at just under 3%, with the "core" hovering at 2%.

The next Fed meeting is June 28-29. On June 14 we will see the May inflation numbers (8:30 AM). Given the significant rise in the ISM prices data (see above), there is reason to think the recent trend in inflation may persist. We will know in 11 days.

If we see an inflation number for May that continues the recent rapid rise in inflation, the Fed may feel they have no choice but to raise rates yet again, even in the face of data which suggests the economy is slowing. A central bank is nothing more than its inflation-fighting reputation. If they fail to raise rates and inflation continues to rise, they will soon find themselves in a position of having to raise more than they would really like, and risk putting the economy into a real recession.

Or, they could pause and see if a slowing economy will naturally lower the inflation rate. I personally think we will see inflation trend back down during what I think will be a slowdown in the latter part of this year and the first part of next year.

For what its worth, and it's not worth much, I think the Fed will raise rates in June once again. The inflation data will give them the impetus to do so, and then they have six weeks to sit back and watch until the August 8 meeting. Stay tuned.
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See more of John Mauldin's Frontline news letter at www.2000wave.com/

[ajtj99]

Burk, since core inflation excludes energy and food, you're basically saying inflation is low because rent, which is 40% of the CPI and likely 60% of the core rate, is not going up.

Less than 30% of people rent. Housing costs have ballooned.

Ask people in your neighborhood if they bought the same house they live in now 4-years ago how much less it would have cost them.

If that isn't inflation, I don't know what is.

I don't see how you can be so callous to what's happening to lower and middle class people and even upper middle class people. Inflation is kicking their hind ends, and it's showing up in most the retailers I talk with.