Pipeline Inflation: Here Already?
A: When the fed announced its actions on Tuesday, some were wondering why the previous bias towards focusing on growth suddenly seemed to disappear. In its place, was more wording about inflation. I've discussed pipeline inflation plenty here on urbandigs.com over the course of the year, and it's clear that with today's economic data it will begin to take headlines once again. Think to yourself sarcastically, ..."you mean, record high energy prices, higher commodity prices, and higher food prices are inflationary?". Yes, they are.
Forget the whole argument about headline vs core for a moment (read my recent post, "Fake OR Real Inflation?", back in mid November - Search Results for ALL "inflation" articles), today's CPI data came in hotter than expected all around. According to Yahoo Finance:
The Labor Department said the consumer price index rose 0.8 percent in November amid a spike in gasoline prices. The 0.8 percent increase in consumer prices topped the 0.6 percent rise economists had been expecting. The report also showed core inflation, which excludes often-volatile food and energy prices, rose 0.3 percent, the biggest increase in 10 months. The report also found large increases in the cost of clothing, airline tickets and prescription drugs.This is important because it will change the roadmap of policy actions by our fed. It will also bring treasury yields up & strengthen the US dollar; all part of the system correcting itself and certain markets reverting back to the mean (treasury's & currency's).The report raises questions about the Fed's plans for priming the economy.
If the fed either doesn't ease as much or is forced to consider rate hikes sooner rather than later, it will strengthen US dollars. Think of how many traders are short US dollars and will ultimately need to cover those positions!
Barry Ritholtz over at The Big Picture provides this chart on the year-over-year changes of the CPI Headline & Core #'s showing the sharp uptick since July:
The 0.8% gain was the largest since Hurricane Katrina's boosted CPI in September 2005. That was obviously a weather induced number, and you need to go all the back to January 1990 to find a comparable CPI price increase. And the so-called Core? 0.3% gain was the most since June 2001.So, what do these inflation figures really mean?
Well, you can forget about a half point cut anytime soon -- at least until the Fed has gone from nervous to scared $#@tless. That's how you know they are in full blown panic mode.
Pipeline inflation (as I like to call it), the buildup of inflation from the past 6-12 months that is yet to trickle down into higher prices for consumers and be reflected in economic reports, is very real. While we may see short term rate easing as the fed tries to stave off any slowdown from the credit crunch, we are probably in for a medium-longer term period of rate hikes. It's just that this credit crisis needs to show signs of normalization, and the housing market needs to stabilize before the fed can risk raising rates; so we have some time and maybe even another rate cut or two in the near term as recession fears remain.
As for lending rates, I would expect them to tick higher on this report. However, you must keep in mind that these days there is less and less relation of fed action and bond yields on lending rates. The reason is the credit crunch, the risk that comes with mortgage lending, and the risk aversion of the banks to this type of lending. Add that all together and you get:
a) higher cost of debt
b) tighter underwriting
c) fewer loan options
...so yes, the credit crunch is related to real estate on a macro level. The time it takes to hit local markets will lag. My thoughts on our fed? I think they will still act in the near term (lower rates) as the credit crunch lingers, but that longer term we will see the lagging effects of global inflation leading to a more sustained campaign of rate hikes in the years to come.
Related:
Inflation in the Euro Zone Climbs (AP)
Inflation in the 13 nations that use the euro surged to 3.1 percent in November versus a year earlier, its highest level in more than six years, the European Union's statistics agency Eurostat said Friday. It is now well over a guideline of just under 2 percent that the European Central Bank looks to when it decides whether to raise interest rates to boost borrowing costs.Inflation: Hot & Getting Hotter (BusinessWeek)But the ECB is now under pressure to keep rates on hold to encourage reluctant banks to keep lending out money to each other in the wake of a credit crisis where they are worried about taking on extra debt.
A larger than expected pop in the November consumer price index may temper the Fed's willingness to loosen policy any further. As if the Federal Reserve didn't have enough headaches these days, inflation appears to be on the march after a long period of relative quiet. Case in point: The release of the U.S. consumer price index for November on Dec. 14. The headline CPI surged 0.8% on the month, while the core rate, which excludes food and fuel, rose 0.3%. Markets expected tamer rates of 0.6% and 0.2%, respectively, according to S&P MarketScope.
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