Paulo's Econ Watch

Showing all posts tagged #inflation:

US Inflation broadly in line with consensus

Posted on May 17th, 2016

Main takeaways:

Monthly headline (0.4%mom, 1.1%yoy) and core inflation (0.2%mom, 2.1%yoy) broadly in line with market consensus.
Inflation momentum at 2.4%.
Sticky-price CPI (a proxy for expectations) is at 2.5%.
Inflation expectations moving sideways and inflation compensation moving up.

Headline CPI up, core CPI down

Inflation momentum off the highs, but still at 2.4%

Inflation momentum above annual core inflation

Sticky prices suggest inflation is firming

Measures of inflation expectations and compensation

US inflation up in January, but soft patch likely in the near term in tandem with oil prices

Posted on February 19th, 2016

Main takeaways:

Headline and core inflation both up in January.
Sticky-price CPI (a sign of anchored expectations) is at 2.5%.
Inflation momentum has been around 2.2% for one year.
If oil prices continue to move lower, inflation (headline and core) will likely soften in the near term, mimicking the path observed in late 2014 / early 2015; if this does not happen it could signal strong underlying price pressures.
Some measures of inflation expectations are catching down with inflation compensation -- this was a key concern in the last FOMC meeting.

Headline and core inflation ticked up again...

(headline is a base effect since overall prices are almost flat... but core prices are trending up)

...and inflation momentum hovering around 2.2% for one year now

The chart below shows CPI in the last 6 years. Headline CPI was growing close to the underlying core CPI in a period where oil prices were roughly flat, but the gap opened from mid-2014 onwards with the sharp drop in oil prices. It is interesting also to note that the strong US dollar has, so far, barely dented the trend in core inflation (except for the 2H 2014 period, when core CPI softened a bit in tandem with the sharp drop in energy).

Headline and core inflation could soften again reflecting lower oil prices, repeating what happened in late 2014 early 2015.

(if it doesn't, it could imply stronger underlying price pressures...)

Core goods are almost flat, but core services inflation is rising and reached 3.0% yoy.

Sticky-Price CPI (a sign of anchored expectations) is high

The Atlanta Fed produces a breakdown between 'sticky' vs 'flexible' prices and they argue 'sticky' prices (which is a weighted basket of items that change prices relatively slowly) "appear to incorporate expectations about future inflation to a greater degree than flexible prices".

Market-based inflation expectations and compensation: this is key for the FOMC!

Some survey measures are moving down -- doves will worry.

US: inflation soft patch likely in the near term as oil prices move lower

Posted on January 20th, 2016

Main takeaways:

Headline and core inflation both ticked up in December, but were a bit below market consensus.
Sticky-price CPI (a sign of anchored expectations) ticked down but is still at 2.5%.
Inflation momentum softened from 2.4% to 1.9%.
If oil prices continue to move lower, inflation (headline and core) will likely soften in the near term, mimicking the path observed in late 2014 / early 2015.

Headline and core inflation ticked up...

...but inflation momentum softened back to 2%

Headline and core inflation could soften again reflecting lower oil prices, repeating what happened in late 2014 early 2015

But behind slight increase in YoY core inflation there's a growing divergence. Core goods are 0.4% lower than a year ago while core services are 2.9% higher.

Sticky-Price CPI (a sign of anchored expectations) is high

Market-based inflation expectations and compensation: this is key for the FOMC!

US Inflation: enough to remain confident? (Nov/2015)

Posted on December 15th, 2015

Main takeaway:

Core CPI inflation momentum rose to 2.4% (annualized).
Core services inflation increased from 2.5% yoy in June to 2.9% yoy in November. Core goods are down 0.6% yoy.
Sticky-price CPI (a sign of anchored expectations) is trending up.
Interestingly, core inflation is unabated despite the strong dollar.
Headline inflation will likely move up in the next couple of months due to base effect.

Fed's criteria for raising rates:

"The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."

Given the expected hike tomorrow, the Fed is reasonably confident inflation will move back to 2%.

The focus, then, is likely to move toward the criteria the Fed will use to justify the second rate hike.

The chart below shows CPI in the last 6 years. Headline CPI was growing close to the underlying core CPI in a period where oil prices were roughly flat, butMarket forecasts, on the other hand, are betting on a secular stagnation type of story -- r* remains zero for the next two years and monetary policy stance remai

the gap opened from mid-2014 onwards with the sharp drop in oil prices. It is interesting also to note that the strong US dollar has barely dented the trend in core inflation.

The chart also shows that headline yoy inflation is likely to increase in the next couple -- unless the drop in oil prices is big enough to offset the drop in inflation observed in Nov/14-Jan/15 period. Even if headline inflation remains flat in the next couple of months, the yoy figure will increase from the current 0.4% to 1.4% in January.

Today's CPI print showed another increase in core inflation momentum (3-month annualized inflation). Core inflation momentum moved from 2.2% to 2.4%:

Average YoY measure of core inflation is currently at 2.1% -- the most recent low was 1.8% in May, but overall core inflation has been stable at around 2% since mid-2012.

But behind slight increase in YoY core inflation there's a growing divergence. Core goods are 0.6% lower than a year ago while core services are 2.9% higher.

Note how the pace of increase in core services prices increased in the last few months! It is very close to the average 3% inflation observed during 2002-2008 period.

Housing prices (rental and OER) represents 33% of CPI and is increasing at 3.2% yoy.

Sticky-Price CPI (a sign of anchored expectations) is trending up

Overall prices, outside of energy group, do not seem to have bent to low oil prices and strong dollar.

Market-based inflation expectations and compensation

US Inflation: Are we there yet? Yep (Oct/2015)

Posted on November 17th, 2015

Main takeaway:

Core CPI inflation momentum rose to 2.2% (annualized). The last two months hit 2.7% (ar).
Core services inflation increased from 2.5% yoy in June to 2.8% yoy in October. Core goods are down 0.7% yoy.
Sticky-price CPI (a sign of anchored expectations) is trending up.
Is that enough to be reasonably confident inflation will move back to its 2% objective?

Fed's criteria for raising rates:

"The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."

So Fed needs to be reasonably confident inflation will move back to 2%. Are we there yet?

A month ago, Fed comments suggested the Fed was getting increasingly worried about downside risks to inflation (due to oil prices, strong dollar, slowdown in economic data). More recently, the message was more upbeat and a few Fed speakers even mentioned the keyword -- saying they were getting confident inflation would converge to target.

Today's CPI print showed an increase in core inflation momentum (3-month annualized inflation) and thus should increase Fed's confidence. Core inflation momentum moved from 2% to 2.2% -- but the annualized inflation in the last two months is an even higher 2.7%:

Average YoY measure of core inflation is currently at 2.1% -- the most recent low was 1.8% in May, but overall core inflation has been stable at around 2% since mid-2012.

But behind the stability in YoY core inflation there's a growing divergence. Core goods are 0.7% lower than a year ago and core services are 2.8% higher. Note how the pace of increase in core services prices increased in the last few months! It is very close to the average 3% inflation observed during 2002-2008 period.

Housing prices (rental and OER) represents 33% of CPI and is increasing at 3.2% yoy.

Sticky-Price CPI (a sign of anchored expectations) is trending up

Overall prices, outside of energy group, do not seem to have bent to low oil prices and strong dollar.

Market-based inflation expectations and compensation

US Inflation 1-1 with oil prices in the last 10 years

Posted on October 15th, 2015

The chart below plots oil prices vs CPI inflation for the last 10 years. One can see that there is a close association.

Indeed, using only oil prices one could have forecast the recent prints of CPI inflation.

Meanwhile, consumer prices excluding energy (and food) are very close to the median observed in the last 15 years (shades in the chart below are 1 and 2 standard deviation). And this happens despite the strengthening of the US dollar.

So, why is everyone worried about deflation / lowflation in the US?

US Inflation chart pack - are we there yet? (Sep/2015)

Posted on October 15th, 2015

Fed's criteria for raising rates:

"The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."

So Fed needs to be reasonably confident inflation will move back to 2%. Are we there yet?

No. Recent Fed comments suggest the Fed is increasingly worried about downside risks to inflation (due to oil prices, strong dollar, slowdown in some recent economic data).

Consumer inflation is not there yet, but inflation momentum (3-month annualized inflation) is hovering around 2.0% in the last three months to September.

The chart below shows that CPI excluding energy is growing at 1.9% for 2 years -- with no sign of an impact of the stronger US dollar on overall price level. It is very hard to infer an slowdown in price increases from the chart below.

The reason for the steady pace of overall inflation (ex energy) is that services prices are increasing at a healthy 2.7% yoy (and 2.5% in the last 2 years). This is not far behind where core services were before the recession.

Housing prices (rental and OER) represents 33% of CPI and is increasing at 3.2% yoy.

See the detailed chart pack below.

Core inflation momentum moved from 1.5% in Jan to 2.4% in June and down to 2.0% in September. (2% in the last three prints - July, August, September).

Trimmed-mean CPI -- mentioned in the minutes -- moved from 1.2% to 2.1% and then to 1.9% in the same comparison.

The chart below looks at the average of the three measures of core inflation over a longer time span. Despite all the talks of deflation / lowflation, annual core inflation has barely moved since late 2011.

Core CPI at 1.9% and CPI ex energy at 1.8%.

It's all about energy...

...and goods. Services inflation running at a healthy 2.7%

Oil prices are spilling over to core. Core inflation excluding airfares is a bit higher. Looking at this chart it is hard to understand the Fed's fears of inflation remaining low...

Gasoline prices down again

Sticky-Price CPI growth remains stable -- a sign of anchored expectations

The Atlanta Fed produces a breakdown between 'sticky' vs 'flexible' prices and they argue 'sticky' prices (which is a weighted basket of items that change prices relatively slowly) "appear to incorporate expectations about future inflation to a greater degree than flexible prices".

The chart below shows that 'sticky' prices remain...well, sticky at around the 2% level annually. Moreover, sticky prices inflation is down but is running very close to 2%. This is in clear contrast to the 2009 to 2011 period which clearly showed concerns about future inflation.

Market-based inflation compensation is falling...this moves with oil prices and FOMC decided to downplay this by move late 2014.

US Inflation chart pack - are we there yet? (Aug/2015)

Posted on September 16th, 2015

Fed's criteria for raising rates:

"The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."

So Fed needs to be reasonably confident inflation will move back to 2%. Are we there yet?

Consumer inflation is not there yet, but inflation momentum (3-month annualized inflation) is hovering around 2.0% in the last three months to August, a bit lower than in the previous months (note: there's a 0.5pp gap between CPI an the target PCE inflation).

The minutes of July's FOMC meeting (FOMC: moving closer, but with no conviction) showed an increasing concern with downside risks to inflation -- and this was before a further drop in oil and commodity prices and further strengthening of the dollar. Late last year, when oil prices were collapsing, the Fed (Yellen, Fischer) made the case that low inflation was not a big concern -- it is a lagging indicator, so the focus should be on labor market slack. More recently, the Fed appears to get cold feet about moving off the ZLB and inflation concerns are making a comeback. Moreover, headwinds (e.g. stronger dollar) could strength the doves' case.

See the chart pack below.

Core inflation momentum moved from 1.5% in Jan to 2.4% in June and down to 2.0% in August.

Trimmed-mean CPI -- mentioned in the minutes -- moved from 1.2% to 2.1% and then to 1.9% in the same comparison.

Core CPI at 1.8% and CPI ex energy also at 1.8% (unchanged from July)

It's all about energy...

...and goods. Services inflation running at a healthy 2.6%

Oil prices are spilling over to core. Core inflation excluding airfares is a bit higher.

Gasoline prices down again

Sticky-Price CPI growth remains stable -- a sign of anchored expectations

The Atlanta Fed produces a breakdown between 'sticky' vs 'flexible' prices and they argue 'sticky' prices (which is a weighted basket of items that change prices relatively slowly) "appear to incorporate expectations about future inflation to a greater degree than flexible prices".

Market-based inflation compensation is falling...this moves with oil prices and FOMC decided to downplay this by move late 2014.

US PPI Chartpack: +0.0%mom, a tenth above mkt expectations (Aug-15)

Posted on September 11th, 2015

The producer price index final demand was a tenth above market expectations in august: 0.0%mom and -0.8%yoy.

Chart 2 below breaks down producer prices for final demand goods. Core goods (excluding food and energy) remais steady at the 1% trend.

Chart 3 breaks producer prices for final demand services. Core services running at 1.6%.

Charts 4 to 6 breaks down producer prices by stage of processing. Stage 1 intermediate demand index measures price changes for products purchased by industries that primarily produce output sold to industries classified in stage 2; stage 2 measures input prices for industries that produce output sold to stage 3 and so on. Stage 4 measures input prices of industries that primarily sell to final consumers (i.e., personal consumption, capital investment, government purchases, and exports). Here are some examples of which kind of industries is included in each stage of production.

Chart 1)

Chart 2)

Chart 3)

Chart 4)

Chart 5)

Chart 6)

Chart 7)

US - Employer costs for wages and salaries (2Q15)

Posted on September 9th, 2015

O BLS divulga uma pesquisa sobre os custos (wages, benefits) para o empregador, chamada ECEC (Employment Cost for Employee Compensation), que utiliza a mesma base da dados do ECI (Employment Cost Index) - a National Compensation Survey.

A principal diferença entre o ECI e o ECEC é que o ECI usa peso fixo para o emprego, de modo que o ECI mede a evolução dos salários sob a ótica do empregado (abstraindo das mudanças na composição do emprego), enquanto que o ECEC mede sob a ótica do custo para o empregador.

Os gráficos abaixo mostram que em ambas as métricas (ECI e ECEC) o primeiro trimestre pareceu excessivamente elevado e houve um arrefecimento no 2Q -- porém o ECEC sugere que houve de fato uma mudança no patamar de salários e total compensation.

Total compensation vs wages

Wages - incluindo o AHE da pesquisa do payroll