Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Stock Market Deviation from Overall Outlook for 2020 - 22nd Feb 20
The Shanghai Composite and Coronavirus: A Revealing Perspective - 22nd Feb 20
Baltic Dry, Copper, Oil, Tech and China Continue Call for Stock Market Crash Soon - 22nd Feb 20
Gold Warning – This is Not a Buying Opportunity - 22nd Feb 20
Is The Technology Sector FANG Stocks Setting Up For A Market Crash? - 22nd Feb 20
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

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