Inflation is here! says Econoday, per last week’s CPI report; at 2.1 percent for total consumer prices (columns in graph) and 2.2 percent for the core rate (red line). Two percent is generally considered the target rate for inflation, the rate consistent with stable and sustainable economic growth.
The last time both the CPI and the core were actually together at the 2 percent line was way back in February 2013. And then it plunged into negative territory, as the federal government shut down in 2013 for two weeks over Republican’s refusal to raise the debt ceiling. The U.S. had already lost its S&P AAA rating on sovereign Treasury debt in 2011, and instituted the sequester agreement putting an across the board cap on government spending.
Then oil prices plunged along with worldwide commodity prices in 2014 due to slowing growth in the so-called BRIC emerging economies (Brazil, Russia, India, and China), so that U.S. industries cut back their investment spending, as well.
The current rise in the CPI is mostly due to higher energy prices as economic activity (and oil prices) have picked up with U.S. final Q3 GDP growth at 3.5 percent. Energy prices are up 1.5 percent in the month, their fourth straight strong monthly gain with the yearly rate now well above the inflation rate at 5.4 percent.
But inflation may not be here to stay, as there is massive uncertainty over what exactly the Trump economic policies will be. Tax cuts and fewer government regulations will certainly stimulate additional growth, and so higher inflation, which is necessary to put more people back to work.
Medical care has also been a consistent source of strength though recent readings have been fading, up only 0.2 percent in December for a yearly 4.1 percent. Housing is another area of strength, up a tangible 0.3 percent in the month and at 3.0 percent year-on-year. Owners’ equivalent rent, which is a closely watched subcomponent of housing, also rose 0.3 percent.
Where will the growth come from? From the manufacturing sector, if Trump succeeds in implementing that massive $1 trillion infrastructure spending he has promised. The manufacturing component of the industrial production could manage only a 0.2 percent gain in December, said Econoday, one that followed a 0.1 percent decline in November.
Factory output during 2016 (red line) proved dead flat once again, not getting any help from exports (columns). Exports were on the rise several years back and were helping production as seen on the left side of the graph, but the progress has since fizzled, as the BRIC economies are still in a recession mode.
So there may not be much inflation this year. And the Fed would counteract any inflation increase with higher interest rates, anyway, which they said they would do maybe two or three times in 2017, if necessary.
Harlan Green © 2016
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