Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
What ECB’s Tiering Means for Gold - 17th Nov 19
DOJ Asked to Examine New Systemic Risk in Gold & Silver Markets - 17th Nov 19
Dow Jones Stock Market Cycle Update and are we there yet? - 17th Nov 19
When the Crude Oil Price Collapses Below $40 What Happens? PART III - 17th Nov 19
If History Repeats, Gold is Headed to $8,000 - 17th Nov 19
All You Need To Know About Cryptocurrency - 17th Nov 19
What happens To The Global Economy If Oil Collapses Below $40 – Part II - 15th Nov 19
America’s Exceptionalism’s Non-intervention Slide to Conquest, Empire - and Socialism - 15th Nov 19
Five Gold Charts to Contemplate as We Prepare for the New Year - 15th Nov 19
Best Gaming CPU Nov 2019 - Budget, Mid and High End PC System Processors - 15th Nov 19
Lend Money Without A Credit Check — Is That Possible? - 15th Nov 19
Gold and Silver Capitulation Time - 14th Nov 19
The Case for a Silver Price Rally - 14th Nov 19
What Happens To The Global Economy If the Oil Price Collapses Below $40 - 14th Nov 19
7 days of Free FX + Crypto Forecasts -- Join in - 14th Nov 19
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19
Gold and Silver - The Two Horsemen - 11th Nov 19
Towards a Diverging BRIC Future - 11th Nov 19
Welcome to the Zombie-land Of Stock Market Investing - 11th Nov 19
Illiquidity & Gold And Silver In The End Game - 11th Nov 19
Key Things You Need to Know When Starting a Business - 11th Nov 19
Stock Market Cycles Peaking - 11th Nov 19
Avoid Emotional Investing in Cryptocurrency - 11th Nov 19
Australian Lithium Mines NOT Viable at Current Prices - 10th Nov 19
The 10 Highest Paying Jobs In Oil & Gas - 10th Nov 19
World's Major Gold Miners Target Copper Porphyries - 10th Nov 19
AMAZON NOVEMBER 2019 BARGAIN PRICES - WD My Book 8TB External Drive for £126 - 10th Nov 19
Gold & Silver to Head Dramatically Higher, Mirroring Palladium - 9th Nov 19
How Do YOU Know the Direction of a Market's Larger Trend? - 9th Nov 19
BEST Amazon SMART Scale To Aid Weight Loss for Christmas 2019 - 9th Nov 19
Why Every Investor Should Invest in Water - 8th Nov 19
Wait… Was That a Bullish Silver Reversal? - 8th Nov 19
Gold, Silver and Copper The 3 Metallic Amigos and the Macro Message - 8th Nov 19
Is China locking up Indonesian Nickel? - 8th Nov 19

Market Oracle FREE Newsletter

How To Buy Gold For $3 An Ounce

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