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US inflation low and stable [ClearOnMoney]
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US inflation low and stable

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Commentary

US inflation low and stable

21 May 2013 by Jim Fickett.

Headline inflation is only running at 1.1%, but that is because of a temporary dip in energy prices. Core inflation, which better indicates the trend, is running at 1.7%, near the fairly universal central bank target of 2%. The biggest single driver of inflation, the cost of housing, has been going up at an annual rate of about 2% for over a year. Central bankers take “inflation expectations” seriously but, in fact, they are meaningless.

Here are headline and core inflation:

Here is the price level data for housing:

My position on the future of inflation is that there is significant danger. I am not predicting high inflation; in fact I don't think anyone can predict inflation. But highly unconventional monetary policy, combined with a dysfunctional congress and high projected deficits in the long term should certainly make one cautious. The Fed often takes the position that because inflation expectations, measured as the difference between nominal and inflation-linked bonds, are low, there is little danger. In fact, this measure is meaningless. Some time back I posted the following graph (Real bond yields), which shows that nominal bond yields correlate closely with current inflation, but do not anticipate future inflation:

Today John Plender at the Financial Times noted that the inflation-linked bond market shows, in fact, considerable fear about inflation, since people are willing to accept negative yields in order to acquire inflation protection:

Yields on fixed interest bonds are still astonishingly low by historic standards and, despite the protestations of central bankers, this is not because inflation expectations are well anchored because of their magnificent management of their currencies. Negative yields across much of the index-linked market tell us that people are desperate for insurance against resurgent inflation.