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Inflation at the consumer level subsides




Inflation at the consumer level has turned out to be less than I have been expecting. Indeed, over the past three months the CPI is up only 0.9% at an annual rate, and the core CPI is actually down 0.18% at an annual rate. Much of the decline in inflation can be traced to "Owner's Equivalent Rent," the BLS's estimate of how much a homeowner would be paying if he were renting his home. OER is roughly unchanged over the past year, thanks to the depressed housing market. Abstracting from this, as Brian Wesbury points out, we find that "cash inflation" is up 3.2% over the past year.

I agree with Brian that sooner or later we will see CPI inflation moving higher. The CPI is the last place that true inflation trends will show up, because of the way it's constructed and because inflation at the consumer level is very "sticky." Wages don't change much or very fast in response to changing monetary policy, but gold prices, for example, can change on a dime. It can take years for a loss in the dollar's purchasing power to find it's way through the maze of the U.S. economy and through labor contracts. I think it makes a lot more sense to watch the leading indicators of inflation than it does to watch the official measures of inflation.

Sensitive prices that are set in real-time by the market are where the action is. On that score, we have the following evidence which points to higher, not lower inflation: 1) the dollar is weak against most other currencies, having lost one-third of its value in the past 8 years, 2) gold prices have risen 350% since 2001, and are within inches of their all-time highs, 3) industrial commodity prices are up strongly across the board, 4) oil prices have doubled in the past 16 months, 5) real estate prices have bottomed and are now rising in some areas, 6) short-term real interest rates are negative, meaning that effective borrowing costs are unusually low, 7) money velocity is on the rise, which effectively amplifies the Fed's extremely accommodative policy stance, and 8) the yield curve is extremely steep, a classic sign of easy money. I believe that these are all leading indicators of a coming acceleration in inflation at the consumer level that will likely unfold over the next year or so. You can't wait for the CPI to go up before realizing that inflation is a problem.

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