Implications: Ahead of the Fed statement tomorrow, overall consumer price inflation remains quiet. Once again, falling energy prices offset gains in most other major categories. Outside of the energy sector, prices were up 0.1% in November. "Core" prices, which exclude food and energy, rose 0.2% in November and are up 1.7% in the past year. Despite generally quiet inflation of late, there is a rising trend in housing inflation that may help push overall inflation higher over the next couple of years. Owners equivalent rent (the government's estimate of what homeowners would charge themselves for rent) rose 0.3%, the largest gain for any month in 6 years. Given recovering home prices, we expect rents to accelerate in the years ahead. Regardless, for the time being, neither overall inflation nor core inflation is setting off alarm bells. Instead, they suggest the Fed's preferred measure of inflation, the PCE deflator (which usually runs a ΒΌ point below the overall CPI) will remain well below the Fed's target of 2%. We don't expect this to last and expect that inflation will be around the 2% target a year from now. However, for the Fed, the key measure of inflation is its own forecast of future inflation. So, even if inflation moves higher, as long as the Fed projects the rise to be temporary it will not react by raising short-term interest rates. The Fed is more focused on the labor market and, we think, is willing to let inflation exceed its long-term target of 2% for a prolonged period of time until the jobless rate comes down. The best news in today's report was that "real" (inflation-adjusted) average hourly earnings rose 0.2% in November and are up 0.9% in the past year. Given today's news it looks like "real" (inflation-adjusted) consumer spending is growing at a 3.0%-3.5% annual rate in Q4, which should keep real GDP growth positive even if inventory accumulation slows substantially in the quarter.
Click here for a PDF version
|
|
Posted on Tuesday, December 17, 2013 @ 9:55 AM
|