Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Implications for Stock Market - Nadeem_Walayat
2.Odds of Winning Walkers Crisps Spell & Go olidays K, C and D Letters - Sami_Walayat
3.Massive Silver Price Rally During The Coming US Dollar Collapse - Hubert_Moolman
4.Pope Francis Calls For Worldwide Communist Government - Jeff_Berwick
5.EU Referendum Opinion Polls Neck and Neck Despite Operation Fear, Support BrExit Campaign - Nadeem_Walayat
6.David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - Mike Gleason
7.British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - Nadeem_Walayat
8.Gold Price Possible $200 Rally - Bob_Loukas
9.The Federal Reserve is Not Going To Raise Interest Rates and Destroy Gold - Michael_Swanson
10.Silver Miners’ Q1’ 2016 Fundamentals - Zeal_LLC
Free Silver
Last 7 days
It Feels Like Inflation - 26th May 16
Negative Interest Rates Set to Propel the Dow Jones to the Stratosphere? - 26th May 16
S&P Significant Low has Occurred – Not Likely! - 26th May 16
Statistics for Funeral Planning in UK Grave - 26th May 16
Think Beyond Oil And Gold: Interview With Mike 'Mish' Shedlock - 26th May 16
Hard Times and False Mainstream Media Narratives - 26th May 16
Will The Swiss Guarantee 75,000 CHF For Every Family? - 26th May 16
Is There A Stocks Bear Market in Progress? - 26th May 16
Billionaires Are Wrong on Gold - 26th May 16
How NOT to Invest in the Gold Market - 26th May 16
The Black Swan Spotter...Which Saw the Oil-Crash coming; now says the “Invisible Hand” will push Brent to $85 by Christmas - 26th May 16
U.S. Household Debt Still Below 2008 Peak - 25th May 16
Brexit: Wrong Discussion, Wrong People, Wrong Arguments - 25th May 16
SPX is at Strong Resistance - 25th May 16
US Dollar, Back From the Grave? - 25th May 16
Gold : Just the Facts Ma’am - 25th May 16
The Worst Urban Crisis in History Could be Upon Us - 24th May 16
Death Crosses Across The Board Are IRREFUTABLE Stock Market Sell Signals - 24th May 16
Bitcoin Trading Alert: Bitcoin Price Stays below $450 - 24th May 16
Stock Market Crash Death Cross Doom Prevails - 23rd May 16
Did AMAT Chirp? Implications for the Economy and Gold - 23rd May 16
Stocks Extended Their Rebound On Friday - Will They Continue Higher? - 23rd May 16
UK Treasury Propaganda Warns of 3.6% Brexit Recession, the £64 Billion Question? - 23rd May 16
Stock Market Support Breached, But Not Broken! - 23rd May 16
George Osborne Warns of 18% Cheaper House Prices - BrExit for First Time Buyers - 22nd May 16
Gold Bull-Phase I Continues to Confound (The Trek to “Known Values”) - 22nd May 16 r
Avoiding a War in Space - 22nd May 16
Will Venezuela Be Forced to Embrace the US Dollar? - 21st May 16
Danish Central Bank Stumbles with Its Currency Peg to the Euro - 21st May 16
SPX Downtrend Underway - 21st May 16
George Osborne Warns of More Affordable UK Housing Market if BrExit Happens - 21st May 16
Gold And Silver 11th Hour: Globalists 10 v People 0 - 21st May 16
David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - 21st May 16
Gold Stocks Following Bull Analogs - 20th May 16
The Gold Chart That Has Central Banks Extremely Worried - 20th May 16
Silver Miners’ Q1’ 2016 Fundamentals - 20th May 16
Stock Market Rally At the End of the Road? - 20th May 16
British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - 20th May 16
NASDAQ 100, FTSE, and British Pound - When Rare Market Data Screams, Listen  - 20th May 16
Unintended Consequences, Part 1: Easy Money = Overcapacity = Deflation - 19th May 16
The Federal Reserve is Not Going To Raise Interest Rates and Destroy Gold - 19th May 16
Stock Market Final Supports Are Broken - 19th May 16
Gold - Pro-Inflation? Anti-USD? - 19th May 16
Further Stock Market Uncertainty As Indexes Gained On Friday, Will Uptrend Resume? - 19th May 16
What This U.S. Presidential Election Tells Us About Her Millennial Generation - 18th May 16
Stock Market Trendline Broken on Fed Announcement - 18th May 16
An Incredibly Simple, Rarely Used Way to Book 170% Investing Gains - 18th May 16
Statistically Significant Stock Market Death Cross? - 18th May 16
Precisely Wrong on US Dollar, Gold? - 18th May 16
What You Can Gain From One Tech CEO's $355 Million Loss - 18th May 16
The ‘Tide’ has turned… NEGATIVE For STOCKS!!! - 18th May 16
Goldman Sachs's - Regulatory Climate is Chilling Deals; Hatzius Not Worried About a Recession - 18th May 16
Bitcoin Price Remains above $450 - 18th May 16
Crude Oil Price Trend Forecast 2016 Implications for Stock Market - 17 May 16
Could the National Debt Really Grow as High as $31 Trillion by 2023? - 17 May 16
Gold Price Possible $200 Rally - 17 May 16
Crisis Investing - Jim Rogers on “Buying Panic” - 17 May 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Why 95% of Traders Fail

U.S. Inflation: Prepare for 4% or more!

Economics / Inflation Feb 22, 2016 - 02:53 PM GMT

By: Ned_W_Schmidt

Economics

Last we visited on the subject of U.S. inflation (November, 2015) we wrote,

"Using those simplistic numbers suggests that U.S. inflation as measured by the [headline] CPI could rise to an annual rate of about 4% ..."


That possibility is now increasingly likely given recent rise in U.S. inflation. This view is reaffirmed by recent data. If an error exists in this projection, it is to underestimate potential for inflation in U.S. to rise.

US Median CPI

Analyzing the state of U.S. inflation begins with the median CPI produced monthly by Federal Reserve Bank of Cleveland. What is the median CPI? To calculate the headline CPI for any particular month the rate of change is calculated for each of the components of the CPI such as energy, food, and housing. Headline CPI is then calculated by weighting each of those components to produce a weighted average. Median CPI is that rate of change for which half of the components had a higher rate of change and half had a lower rate of change. It divides a ranking of the component rates of inflaton in half. The median is less impacted by extreme changes in the prices for anycomponent which can in someways distort the weighted average CPI.

In top chart is plotted the year-to-year percentage change for the median CPI. Two observations are worthy of mention. These observations suggest that expectations of higher U.S. inflation are reasonable and likely to be correct. First, the latest observation exceeds the previous high. Second, in January the year-to-year percentage change rose to the highest level since 2009.

US Headline CPI

Before we move to what the median CPI might be saying about U.S. inflation, let us take a brief look at recent developments in U.S. inflation. In chart to right is plotted the year-to-year percentage change for the headline CPI. Notice that it has risen fairly dramatically in recent months. See arrow.

Era of no inflation is over. U.S. inflation has moved back into a "trading range" of 1-2% in which it had moved for several years. That may suggest the low inflation experienced was an aberration, not an equilibrium state.

Chart below compares the year-to-year percentage change for the headline CPI, black line, with that for the median CPI, red line. Twice early in the chart the headline CPI moved below the median CPI. In both of those cases the headline CPI rate of change turned up and moved above the median CPI. In the first of those cases the rise in the headline CPI rate of change was roughly 4 percentage points from low to high, as highlighted by blue arrow.

US CPI: Headline and Median

In the second case the rise from low to first high was about 4.5 percentage points and 6 percentage points to the ultimate high in the rate of headline inflation.

Median CPI is one of several measures of central tendency, as is the weighted average used for the headline CPI. However, the median is not distorted by high and low values as is the case with averages. Note how far less volatile the median is compared to the weighted average. It may be in the above instance the better measure of central tendency. It seems to act as a "magnet" for the headline CPI, returning the calculation to a more "normal" reading.

In the more recent data, right hand side of graph, the headline CPI is below is running below the median and it has turned up sharply. Current situation is developing much like the earlier two cases. Using4 percentage points as suggested by those earlier moves, a common number in the above discussion, suggests that the headline CPI which had a low of roughly 0% is likely beginning a move to 4%, as highlighted by the third blue arrow, or higher. Several factors, which includes time and the mechanics of averaging, may contribute to coming rise in U.S. headline inflation.

First of those is oil prices. Writers seem to often have difficulty with verb tense. Oil prices have fallen, meaning yesterday. Oil prices are not falling, meaning present time. Looking forward from today, oil prices are likely to rise, though perhaps by not much. Commodity price are self correcting, though often the process is lengthy. The "dividend checks" from the oil price slide have largely been cashed and spent. Those declining oil prices did have a tendency to depress other prices. That good news is slowly fading into history. Oil prices should now begin to buoy and then cause other prices to rise.

The speculative advance in the value of the U.S. dollar against other currencies is beginning to fade. Rising value of the dollar depressed dollar denominated prices as foreign purchasers could not and cannot afford those dollar denominated commodities and goods. The value of their currency having fallen means foreign consumers cannot purchase the same amount of U.S. goods and commodities. A simple ending of the speculative advance will begin to support dollar denominated prices. And if it declines as it should, dollar denominated prices will rise.

Third is the long overdue normalization of interest rates in the U.S. While the path is unclear, the need to remove the interest rate distortions in the U.S. economyseems obvious to the Federal Reserve. Abnormally low interest rates of recent years have caused funds to shift to the financial sector. Prices of financial assets rose, but are ignored in the calculation of inflation. Normalization of interest rates will shift funds from speculation in financial markets to the real economy, which is included in the calculation of the CPI. As fund flow from speculation to real activity, prices in latter sector should firm and rise, pushing up the CPI.

With U.S. inflation headed to 4%, and likely higher, is your portfolio positioned to prosper? The "markets" have already begun to discount this development. Fantasy "growth" stocks have fallen, and continue to be the most vulnerable. Gold has moved sharply higher, jumping by more than $200 at one point. Gold stock ETFs have risen from their lows by more than 40%. These market adjustments are a reminder to investors that diversification is still smarter than any and all strategists. If you have missed the first step in a new Gold bull market, today is the time to correct that inefficiency.

By Ned W Schmidt CFA, CEBS

Ned W. Schmidt,CFA has had for decades a mission to save investors from the regular financial crises created by economists and politicians. He is publisher of The Value View Gold Report, monthly, with companion Trading Thoughts. To receive these reports, go to: www.valueviewgoldreport.com Follow us @vvgoldreport

Copyright © 2016 Ned W. Schmidt - All Rights Reserved

Ned W Schmidt Archive

© 2005-2016 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

Catching a Falling Financial Knife