Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19
Is the Stock Market Making a V-shaped Recovery? - 11th Aug 19
Precious Metals and Stocks VIX Are About To Pull A “Crazy Ivan” - 11th Aug 19
Social Media Civil War - 11th Aug 19
Gold and the Bond Yield Continuum - 11th Aug 19
Traders: Which Markets Should You Trade? - 11th Aug 19
US Corporate Debt Is at Risk of a Flash Crash - 10th Aug 19
EURODOLLAR futures above 2016 highs: FED to cut over 100 bps quickly - 10th Aug 19
Market’s flight-to-safety: Should You Buy Stocks Now? - 10th Aug 19
The Cold, Hard Math Tells Netflix Stock Could Crash 70% - 10th Aug 19
Our Custom Index Charts Suggest Stock Markets Are In For A Wild Ride - 9th Aug 19
Bitcoin Price Triggers Ahead - 9th Aug 19
Walmart Is Coming for Amazon - 9th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

March U.S. CPI Inflation Points Highlights Economic Risks

Economics / Inflation Apr 15, 2012 - 09:07 AM GMT

By: Tony_Pallotta

Economics

Best Financial Markets Analysis ArticleFriday's release of the March consumer price index (CPI) highlights the risk facing the US economy as we have been discussing over the past few weeks. When the US exited the 2008 recession (using exited loosely) it was not final demand from consumers that initiated growth but rather government stimulus. Debt as is the case with most recoveries is what fuels the initial leg.


Once economic growth begins the hope is that demand will accelerate and the recovery will become self-fulfilling with no need for additional government stimulus. So demand is the key to a sustainable recovery which is fueled by confidence and rising real or inflation adjusted wages. Clearly confidence is back as proven by Friday's release of March consumer confidence as it remains at multi-year highs.

But the wage component is missing as the following chart clearly shows. Notice how the rise in inflation as measured by CPI offsets the rise in wages. In other words there has been zero real (inflation adjusted) wage growth.

CPI and Income - Monthly Percent Change

So how are consumers able to buy more? Since inflation is offsetting monthly gains in wages the only way is to spend a higher percentage of their income. Which is in fact happening as the savings rate has been falling to mulit-year lows. The problem is history has shown this to be unsustainable for an extended period of time.

Monthly Personal Savings Rate

So if we know that a falling savings rate is not a long term solution to increasing demand then we must focus on inflation and that is where this month's CPI report was a bit disturbing. First the numbers. Below is a chart of the monthly rise in CPI for both core (where food and energy are for some odd reason removed) and for all goods and services.

Now notice the orange horizontal line which represents the Fed's inflation target of 2%. Prices are currently above that level which means the current risk is inflation not deflation.

Consumer Prices Monthly Change

Price inflation had been limited to non-discretionary items like groceries, gas, etc. Since we are forced to purchase these items manufacturers have greater freedom to "push through" their input costs and thus maintain margins.

But in the discretionary category that was not the case. Retailers for example could not push up the price of a sofa or apparel for those purchases are "discretionary." A sofa can wait but gas in the tank or food on the table cannot.

Notice how discretionary categories like apparel have gone from deflationary (contracting prices) in December through Fedbruary to now inflationary in March. I also found it interesting that used car inflation is outpacing that of new cars.

CPI Percent Change

Bottom Line

So you may ask who cares if discretionary prices are rising. Well there are two concerns. First it will further pressure demand on a real basis as you will basically sell less products when inflation adjusted which in turn will pressure the labor market and the overall economy.

But more important is the threat to wage inflation. If consumers are now confronted with higher prices for discretionary items they will begin to seek higher wages from their employers. Wage inflation is when inflation truly sets in and becomes a problem for one simple reason. Once you give someone a raise good luck taking it back.

If wage inflation sets in then the consumer is less concerned about rising discretionary prices which will actually drive inflation higher. The result is a self driving inflationary cycle and with the Fed sitting on a massive balance sheet with huge interest rate risk this is something they will be truly powerless to combat. Even though the Chairman told the world in December 2010 inflation was not a concern as he could "adjust interest rates in fifteen minutes." To that I wish the distinguished gentleman good luck.

By Tony Pallotta

http://macrostory.com/

Bio: A Boston native, I now live in Denver, Colorado with my wife and two little girls. I trade for a living and primarily focus on options. I love selling theta and vega and taking the other side of a trade. I have a solid technical analysis background but much prefer the macro trade. Being able to combine both skills and an understanding of my "emotional capital" has helped me in my career.

© 2012 Copyright  Tony Pallotta - Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules