ECONOMIC SILUET: How is inflation only 2.5%?

Kamis, 12 Agustus 2021

How is inflation only 2.5%?

THU, AUG 12, 2021

YOUR AFTERNOON NEWS UPDATE AND MARKET ACTION FROM CNBC

AS OF THU, AUG 12, 2021 • 12:40 ET

DJIA		35450.81
		-0.10%	-34.16

S&P 500		4453.22
		+0.12%	+5.52

NASDAQ		14784.28
		+0.13%	+19.14

EDITOR'S NOTE

Yesterday, we spoke to Dallas Fed President Robert Kaplan, one of the most hawkish members of the Fed. He told us that despite the softer-than-expected CPI print in the morning, he still expects "a broadening of inflation pressures into next year," with core inflation of around 2.5%.

Again, this is on the higher side of where the Fed consensus is. But the question I got from viewers was--wait, how on earth does he think inflation is only going to rise 2.5%?! So here are a couple of observations from economist Dave Rosenberg:

> 86% of the core CPI already as of July had an inflation rate of just over 1%

> The other 14% has an inflation rate over 20%, but is the most distorted by Covid

> The core CPI rose 0.3% month-on-month, and excluding cars--which are already showing signs of rolling over--was only up 0.2%

> Citi's "inflation surprise index" has stalled out, and the last time it dropped from levels this high, back in June 2008, the inflation rate went from 5% to -1.4% a year later.

And yes, home prices have been soaring. But as the Fed's Esther George said yesterday, the froth is starting to show signs of slowing. Rosenberg points out that prices for moving/freight services fell 1% month-on-month in July; furniture prices fell for the first time since February; and the cost of window and floor coverings dropped more than 1%. Even pet services dropped 0.4%.

"The inflation we are seeing remains confined to a handful of sectors," Rosenberg wrote, "and the true underlying and non-distorted components...are seeing inflation barely above a 1% rate."

That's how you get analysts like him and Brian Reynolds, who we spoke to yesterday, saying deflation remains a bigger overall economic concern. Reynolds says this augurs lower bond yields--and holy cow, did you see that 10-year Treasury auction yesterday?--and higher stock prices.

It doesn't mean inflation doesn't hurt right now--the headline index rose 5.4% last month, and the White House is begging OPEC to raise oil production to lower gasoline prices. It just means that Fed officials will be loathe to react by tightening financial conditions. And it's how you get Kaplan talking about how core inflation next year will "only" be 2.5%.

See you at 1 p.m!

Kelly

Kelly Evans
Twitter: @KellyCNBC

Instagram: @realkellyevans

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