Inflation Paints Fed Into Corner

Inflation? You Don’t Say!

Underlying inflation accelerated in March, increasing the odds that
the Federal Reserve will continue to raise interest rates despite a
slowing economy:

7 Consecutive Quarters of CPI Gains (1.5% or better)
click for larger chart


Source: WSJ

The CPI gains follow a long rise in Producer Prices (PPI):

click for larger chart


Source: WSJ

Here’s what the Wall Street Journal has to say about yesterday’s CPI data: 

"Consumer prices jumped 0.6% in March from February, the Labor Department said, led by higher energy costs. But even excluding the volatile food and energy categories, "core" prices rose a relatively sharp 0.4%, after a 0.3% increase in February.

Separately, a Federal Reserve survey of business conditions in its 12 districts found "upward price pressures have strengthened, although actual increases to date … have generally remained moderate." The Fed’s "beige book," released yesterday, added: "Much of the pressure derives from energy costs, although contacts cited the lower dollar and rising costs of building materials as well."

Is this really a surprise? As noted yesterday, anyone who was paying attention knows that inflation has been creeping up for 3 years:

Commodity Research Bureau (CRB) Index
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Source: Stockcharts

So where does that leave Easy Al? The Fed is boxed in: They can raise rates, but it will have a negligible effect on Chinese commodity demand, and hence, commodity inflation.

On the other hand, it will have an impact: it will slow the only robust sector of the American Economy — the Real Estate complex.  Everything from Real Estate Agents to Contractors to Builders to Mortgage Brokers to Durable Goods have enjoyed robust expansion due to half century low interest rates. That includes the home builders, as well as Home Depot, Lowes and Masco.


Its another fine mess you’ve gotten us into, Ollie.


U.S. Inflation Picks Up Speed, Bringing Rate Increase Closer

Consumer Prices Rose 0.6% In March on Energy Costs; ‘Core’ Index Climbed 0.4%
Greg Ip
THE WALL STREET JOURNAL, April 21, 2005,,SB111399987730511876,00.html

What's been said:

Discussions found on the web:
  1. bernard1 commented on Apr 21

    The fact that the level of commodity prices increases is not proof that the rate of change of commodity prices increases. To demonstrate accelerating inflation, you must show a positive second derivative of the CRB price index. In order to do this, you must show the CRB index graph in semi-log form. The same goes of course for any nominal index, such as a market index.

  2. Og commented on Apr 21

    Og says, Prices higher bad. Prices lower bad. Prices steady good.

    Og like his cave. Go back there now. Wait til Fed done . . .

  3. dsquared commented on Apr 21

    Bernard; there are two moving averages and a MACD on that chart. If a short term moving average is above a longer term one, then over that term, prices are accelerating.

  4. dsquared commented on Apr 21

    (btw, in my opinion the Fed and everybody else will continue to make wrong decisions about this inflation for as long as they keep on talking about “price pressure”, “demand from China” and everything similar. This is an inflation in the dollar price of goods, but it has very little to do with the demand/supply balance in goods and a lot to do with the demand/supply balance in dollars. Call me Milton Friedman but this inflation, at this time and in this place is a monetary phenomenon).

  5. David Andrew Taylor commented on Apr 21

    I’ve read somewhere in The Economist, that ‘Easy Al’ was “exporting” easy rates to China. Wouldn’t it be arguable that if we could export our easy rates to China, that if Al tightened, we would “export” tighter rates as well?

    I’m looking for the article at The Economist.

  6. bernard1 commented on Apr 21


    Thank you for the information. Strangely enough, if I’d had to time regress such a graph, visually I would have chosen a linear trend as the best looking chance.

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