Saturday, November 12, 2011

Inflation is not going away

The core Fed view toward inflation is that it can be controlled around their core policy rate of 2% and that headline inflation shocks are temporary. The data may suggest otherwise. Headline inflation does have shocks that are mean-reverting but the data is more complex. Deutsche bank has shown that we have not seen a decline in food and energy prices since 1986 when we measure the numbers as a five year rolling average. This may represent a complete business cyle. Prices will rise and fall with the business cycle, but the general direction is higher. 

More important to inflation is that fact that renter costs which represent about 30% of the inflation index are increasing. with vacancies falling the cost of shelter is going up. This information suggests that it will be harder to keep inflation at 2% if we have any economic growth near trend.

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