Friday, February 19, 2016

Economy: Inflation At The Gate

(Drivebycuriosity) - There is a lot talk about deflation. But the facts show that we are much closer to a comeback of inflation. This morning we learned that the US consumer prices were unchanged in January, but ex food & gasoline the prices rose already 0.3% (core inflation), the most in over four years (businessinsider). Compared to the prior year, the general price index rose 1.4% (inflation rate), ex food & gasoline prices grew already 2.3% (core inflation).

The core inflation has been climbing for months driven by rents, health care & other services  (calculatedrisk). In January core services prices jumped 3%, while medical costs rose 3.3%. There were also increases in the costs of cars, clothes and rents (businessinsider). I think that the core inflation rate will continue climbing because the labor market is tightening. Weekly jobless claims are on a historical low level, the job openings are on record high (stlouisfed), the unemployment rate dropped to 4.9% and wages started to climb.  It is highly likely that the tightening labor market will drive wages and therefore labor costs upwards which should translate into higher prices for services and labor intensive goods (like fashion). And we are already experiencing rapidly climbing rents and health care costs.

The headline inflation rate (plus 1.4%) is momentary depressed because of the collapse of oil and other commodity prices. Today oil is around 40% cheaper than last year the same time and gasoline prices at the pump dropped about 25%. But the diminishing price effect of dramatical reduced energy prices is just temporary. There is a risk that general inflation will raise next year more than 2% - and could accelerate - when the diminishing effect of cheaper commodities will run out.

The Fed was right to hike interest rates last December and I think they will continue hiking this year to keep inflation at bay.

PS For illustration I choose one of Andy Warhol dollar signs from 1981. 

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