Inflation’s Been A Dud

Based on my experience of spiraling prices in the ‘70s and ‘80s, I never thought I’d be rooting for inflation but I am. Mildly.

I’m not alone. Our estimable Fed chair, Janet Yellen, is also hoping for inflation. Oh, how she hopes. Unfortunately, inflation – at least the Fed’s favorite kind – is lagging. The latest release from the Bureau of Economic Analysis showed a sluggish 1.6 percent annual growth rate in the core PCE (Personal Consumption Expenditures) metric. The Fed targets a 2 percent inflation rate.

Core inflation is the Fed’s favored measure because it excludes price changes in the most volatile items, namely food and fuel. Core inflation is more stable and, presumably, more predictable. You can see how stable the growth rate is in the chart below. Over the past three years, core PCE has averaged an annual growth rate of 1.5 percent while the core CPI (Consumer Price Index) has increased at a 2 percent pace.

Core Inflation Indices (Cumulative Month-to-Month)

 

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The trouble with these numbers is their staleness. The latest available PCE numbers reflects economic conditions as of April. Two months ago. For investors, and especially traders, relying on core PCE is a lot like using just your rearview mirror to guide your car down the road.

There’s an indicator, however, that can give you an instant read on the current inflation environment. If you index the price ratio of SPDR S&P 500 ETF (NYSE Arca: SPYto the Wisdom Tree Continuous Commodity Index ETF (NYSE Arca: GCC), you’ll get a day-by-day look at inflation’s momentum.

SPY represents a broad-based portfolio of blue-chip stocks while GCC tracks an equal-weighted index of 17 commodity futures. The rationale for the index is simple. Inflation’s likely to show up in commodity prices well before it’s expressed in retail goods. When that happens, traders are likely to favor commodities over securities.

You can see from the chart below that inflation’s momentum, after a two-year downtrend, is now bottoming. In fact, there’s been a bullish cross of the indicator’s 50-day moving average over its 200-day average.

It’s early days yet, but I smell inflation brewing.

Daily Inflation Trend Indicator

 

Click to Enlarge

DisclosureBrad Zigler pens Wealthmanagement.com's Alternative Insights newsletter. Formerly, he headed up marketing and research for the Pacific Exchange's (now NYSE Arca) ...

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Moon Kil Woong 7 years ago Contributor's comment

You should be rooting for growth, however like Japan, when housing costs are artificially inflated way beyond income growth and economic growth, you get low, no, or negative growth. We are fortunate to have low growth. There is a cost to blowing asset bubbles. It has now gotten so bad corporations take on debt to buy shares and pay dividends and don't waste money investing in growth because there is none and the equation for optimal asset allocation is to have as little capital and as much leverage as possible. Likewise, although personal debt dropped it is now rising again. We need not talk about government debt, for it is always bad.

Growth causes inflation which is why TBTF banks would prefer if there is none. It destroys their perfect world of them getting free liquidity, dumping assets to the taxpayer at inflated prices, and being able to buy stocks and other assets others can't because their risk profile is different (low to no interest and a guaranteed taxpayer umbrella if things go bad). If anyone wonders why TBTF banks dominate stock trading these days, they aren't looking at the obvious.