Implications: Energy prices have dropped substantially in the past two months. As a result, overall consumer prices dipped slightly in October and were unchanged in November. However, the respite from inflation has been brief and we do not expect it to last. Monetary policy is very loose and the upward trend for inflation will re-start soon. Subdued prices over the past two months are not a justification for the Federal Reserve to pursue another round of quantitative easing. The CPI is still up 3.4% from a year ago. Another measure of inflation we look at is called "cash" inflation, which excludes the government's estimate of what homeowners would pay themselves in rent. This measure is up 4% in the past year and is better at gauging the inflation actually being felt by consumers. "Core" CPI, which excludes food and energy, was up 0.2% in November and is up 2.2% in the past year. This is higher than the Fed's target range, which is supposed to max out at 2%. The Fed has been using modest core inflation to justify loose monetary policy, but that excuse no longer works. Moreover, in the past year, while core prices have grown 2.2%, owners' equivalent rent, which makes up one-third of the core, is up 1.7%. Given the shift from home ownership toward rental occupancy, owners' equivalent rent should accelerate over the next year, putting more upward pressure on the core. On the earnings front, "real" (inflation-adjusted) earnings per hour were down 0.1% in November. However, this comes on the heels of an upwardly revised 0.4% gain in average hourly earnings last month. Although these earnings are down 1.5% from a year ago, the number of hours worked is up 2.1%, giving consumers more purchasing power. In addition, fringe benefits have been growing faster than wages.
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Posted on Friday, December 16, 2011 @ 10:57 AM
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