Inflation Watch: FOMC

The Fed finishes the second day of a 2-dayer, and we are widely expecting a "nuthin’ done" at 2:15. Barring some religous conversion by a majority of Fed members, we will also get the usual boilerplate that the risks between slowing growth and inflation are "balanced."

We know growth is slowing, and we know inflation is "elevated" — but by how much? Here’s two tidbits worth considering.

The first, via Tickersense, is a breakdown of the components of CPI:


Note how over the past year, the Food & Beverage component has expanded. Also noteworthy: how understated the Medical Care portion of CPI actually is. We know that medical costs, prescriptions, hospital stays, insurance, et. al. have been rising at 10%+ per annum. Lastly, the Shelter portion has actually been understated over the past 10 years due to OER (Owner’s Equivalent Rent); Now, it may be slightly overstated.

Tickersense notes: "Over the last seven years, overall prices as measured by the CPI have
risen about 21%.  Of that gain, the cost of shelter is responsible for
over 40%, followed by transportation and food and beverages, with each
comprising about 14% of the total gain."

The second factor the Fed should be mulling over is the global nature of inflation these days. In the UK, the most recent data showed surprising strength in price increases, with inflation pressures being called "persistent."

Bloomberg reported:

"U.K. inflation unexpectedly accelerated in February to the second-fastest pace in a decade, strengthening the case for a further interest-rate increase from the Bank of England.

Consumer prices rose 2.8 percent from a year earlier as air fares and food costs climbed, the London-based Office for National Statistics said today. Economists expected 2.7 percent, the median of 39 forecasts in a Bloomberg survey showed.

The pound rose as investors speculated the central bank will raise borrowing costs again to bring inflation back to the 2 percent target this year. The Bank of England has increased rates three times since August as surging home values encouraged consumer spending, fueling price pressures in Europe’s second- largest economy."

Along with the rest of the world’s central bankers, U.K. policy makers have raised borrowing costs — they are at 5.25% (like the US). Investor in Great Britain widely expect to see a hike to 5.5 by June. The ECB is at 3.75%, while the Bank of Japan is at 0.5%.

Todya’s FOMC decision will be released at 2:15pm . . .


European Economies: UK Inflation
Rate Increased

Brian Swint and Craig Stirling
Bloomberg, March 20 2007

What’s Driving the CPI

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What's been said:

Discussions found on the web:
  1. Macro Man commented on Mar 21

    Yes the BOE is likely to put rates up…amongst tepid wage growth, declining retail growth, a distressed economic underclass, and a sharply rising cost of living. And people think the Fed hasn’t got a clue!

    Interestingly, the one BOE member who did not vote for unchanged rates this month voted for a cut…

  2. Richard commented on Mar 21

    inflation continues to remain outside the fed’s ‘comfort zone’. it’s obvious to me such a statement is insipid at best.

  3. theroxylandr commented on Mar 21

    The conclusion is very simple.

    Inflation will be eliminated by crushing shelter prices. Massive downsizing of 10s of millions people will produce massive empty housing offered for buy or rent for peanuts.

  4. randy commented on Mar 21

    would’nt it be cool if the fed pulled the rug out from under everybody with a rate increace, say .25%. just a thought.

  5. wnsrfr commented on Mar 21

    Anyone remember how little phone, TV (no Internet then) used to cost, say 15-20 years ago?

    Would like to see a band for that one, if you have kids of junior/high school age, “needing” cellphones, your combined TV/Internet/Phone costs are well north of $300/month.

    True for middle class families even more, as 2 working parents require kids to be in touch…and payphones don’t exist anymore!

    But it is all added value, so it isn’t inflation???

  6. Michael Schumacher commented on Mar 21

    Inflation is no problem as long as you don’t eat, don’t go anywhere, don’t get sick, don’t require any form of education, don’t buy any clothes, live in a cardboard box (that cannot be improved upon)… see it’s just THAT simple.

    If the Fed lowers rates then this locomotive of a stock market will remain at these high valuations which will only mean that it wil take some event, like the U.S. invading _________(insert any one of several countries here). These brokers (who incidentally got another money drop on monday to the tune of $8billion from Hank and Ben)are just so damn careless and continue to not use any type of discretion but hey would you if you knew you were going to be bailed out each time the threat of a pullback materialized??


    How about a little color on the fed and treasurey bailouts??….they seem to be getting more and more frequent.


  7. mark commented on Mar 21

    occasionally when my wife sends me out food shopping(rare but it happens) i am shocked when i go to the register and i only have a handfull of items and the bill is 50+. it seems everything i buy now costs three or four dollars an item. my wife chuckles….

  8. J Hudson commented on Mar 21

    The one end to the situation is stagflation.

    Global forces demand an increase in inflation, forces that likely could withstand a US recession. There is no relief in sight for oil prices in the intermediate to long term, and oil’s price has a great ‘trickle down’ impact on many aspects of inflation’s measures.

    Simultaneously a tidal wave of credit has sustained itself to heights where there will be no soft landing.

    I would argue that 50 years from now it will be seen that the fallout from the Asian currency crisis of 1997 has been delayed and delayed until the problem grew to its current (and still increasing) size. We haven’t eliminated cycles at all.

    Without sounding too alarmist, why is it that despite the idea of loss aversion where humans weigh a loss twice as much as a win, do people not consider a Great Depression II a serious possibility?

  9. Michael Schumacher commented on Mar 21

    drops the tightening bias….UNFREAKING BELIEVABLE…

    THe rich will continue to get richer.

    I have no faith in the fed or any other gov’t agency. Was it not there own numbers last week on CPI and PPI (that were way low of the mark) that showed an upward tick of inflation)

    We have truly entered the age of spin….


  10. costa commented on Mar 21

    I cant believe it either. The crap keeps piling up before its going to hit the fan. I guess it will be another 6 months of cramer and the other screaming about Rate cuts and how great the market is.

  11. js commented on Mar 21

    anyone who believes that the Fed cares about containing inflation or maintaining the value of the dollar should take a hard look at this latest statement. <5% sell off in the equity market and Ben runs off to the printing presses. My God, he is dovish than I thought (how is that possible).

  12. tt commented on Mar 21

    lay out some more shorts here

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