Monday, April 18, 2005

Inflation Preview

by Bill McBride on 4/18/2005 04:15:00 PM

UPDATE: Macroblog has a nice review of today's numbers. Look to Angry Bear tomorrow after the CPI is released.

The BLS reports PPI tomorrow and CPI on Wednesday. Over the last year, both the CORE PPI and CPI, less Food and Energy, have been steadily increasing on a year over year basis.


Click on graph for larger image.

Also plotted is the intended FED Funds Rate. A neutral Fed Funds rate would probably be about 150 to 200 basis points above CPI less food and energy. The Fed funds rate is currently at 2.75% with core inflation running about 2.5% to 3%.

The Fed Funds rate is still very accommodative unless the FED expects future inflation rates to fall. Dr. Krugman suggested that we may be seeing "A Whiff of Stagflation"; a slowing economy with rising inflation.

UPDATE: I probably should have include the FED's favorite measure of inflation, the PCE deflator (around 1.6%). The PCE is also steadily increasing and still puts the neutral rate around 3.25% to 3.5%.

The PPI and CPI numbers deserve close scrutiny this week.