Yet another freaking economic indicator that you can file under “getting more attention than unusual because it’s the last one before QE2 blah blah fine great” is Friday’s consumer price inflation index for September
We’ll start with a couple of new graphs from the Cleveland Fed, both using data released since Wednesday:
Import prices actually declined in September because of a drop in fuel costs, but everything else climbed roughly 0.3 per cent (non-annualized) and oil has rebounded since the start of October. The import price index is about 3.5 per cent higher than it was at the same time last year.
And here’s an updated graph with Thursday’s PPI numbers:
The headline figure jumped impressively (an annualized 5.5 per cent over August) and is now up 4 per cent in the last twelve months, though obviously the recent increase in the core number has been very gradual. Regardless, neither producer nor import price increases last month seem to have fed through to CPI last month, at least not yet — but worth keeping an eye on.
And here’s another graph from the Atlanta Fed showing the latest change in the personal consumption expenditure price index, which is sometimes used as an alternative measure to the CPI:
Curiously, Richmond Fed president Jeffrey Lacker, who doesn’t have a vote on the FOMC, on Wednesday used the PCE numbers to say that inflation was “now on target.” He cites the core PCE annual change of 1.4 per cent.
But not only is this below the traditional 2 per cent understood target of the Fed, the trimmed mean — which strips away the outliers — is at 1 per cent and has been trending lower for most of the year.
Fed presidents have had their share of disagreements on everything from the current nature of unemployment (structural vs cyclical) to whether further monetary easing will do any good, but we doubt many of them would agree with Lacker about this.
Regardless, Friday’s CPI number matters for the same reason it did last month. If it shows a surprise spike in inflation, it will confuse matters for the FOMC, which has recently formed a consensus about the need for further easing but — market front-running notwithstanding — hasn’t divulged much about what it considers to be the appropriate amount. The obvious flip side is that a surprise move towards further disinflation will increase expectations for larger asset purchases.
Meanwhile, here’s a snapshot of inflation indexed treasuries from Bloomberg:
| COUPON | MATURITY | PRICE/YIELD | PRICE/YIELD CHANGE | TIME | |
|---|---|---|---|---|---|
| 5-Year | 0.500 | 04/15/2015 | 105-00 / -.60 | 0-01 / -.013 | 15:24 |
| 10-Year | 1.250 | 07/15/2020 | 108-21 / .34 | 0-02 / -.009 | 15:24 |
| 20-Year | 2.500 | 01/15/2029 | 123-11 / 1.09 | 0-12 / -.021 | 15:24 |
| 30-Year | 2.125 | 02/15/2040 | 119-04 / 1.33 | 0-19 / -.023 | 15:24 |
The market is obviously pricing in higher future inflation based on its expectation of what the Fed will do. On Friday we’ll find out if current inflation is playing its role — or complicating things by getting a head start.
Related links:
Inflation offers no excuses – FT Alphaville
QE-easy on commodities too – FT Alphaville