Inflation creeping back into the global economy?

Slightly to the financial markets’ consternation, the latest data for the US consumer price index has shown headline inflation accelerating quite sharply towards a 2.5% annualised rate over the last three months or so. In a purely mechanistic sense, the primary drivers of this surge in prices were food and medical care prices, although transport costs and some other services also contributed to the faster rate of inflation.  In some respects, the acceleration within the CPI was perhaps to have been expected; the previously released producer price index data had already begun to signal higher price pressures in some parts of the economy and particularly within the food-related sectors following the poor weather, which has apparently led to a depletion of animal feeds and rise in meat prices. 

The producer price data had also highlighted the rise in heating fuel prices that occurred during the first quarter’s abysmal weather in the northern hemisphere, the effects of which may still be working its way through the supply chain. Meanwhile, the recent trend towards slightly higher import prices into the USA were also arguing for an upward bias to at least some parts of the CPI data.  Overall, it seems to us that the rise in the rate of inflation should not have been overly unexpected and it was, we suspect, predominantly weather-related rather than particularly “fundamental” in nature.

For some market participants, though, the advent of the higher reported headline rate of CPI inflation, on top of their continued belief that the US economy is somehow booming, initially at least appeared to represent reason enough to expect the now rather new-look Federal Reserve Board (it now has no fewer than five new members) to continue the central bank’s previous tightening bias and to even be considering advancing its rate hike agenda. We must admit that we still find it strange even now just how convinced markets are that the US is “booming” despite the message suggested by the recent very weak GDP figures (which are now conveniently thought by many simply to be “wrong”, despite their consistency with the previously published income data and much of the incoming consumer data – and, we might argue, peoples’ perceptions of the state of the economy out in the real world away from Wall Street). Many portfolio managers, though, simply “assume” that the economy is expanding rapidly and the reported higher inflation – despite its probably temporary, weather-related causes – was viewed as further evidence to support their view that nominal GDP growth is rising and that the FRB will be tightening “soon”.

In fact, it could also be argued that, inasmuch as the rise in the CPI has tended to be a function of rising subsistence and import costs against a background of slowing, rather than accelerating, nominal wage growth (note that despite rumours to the contrary, the three month moving average rate of growth of average hourly earnings has slowed to below 2% annualised from 3% at the beginning of the year – thereby potentially implying negative real wage growth), recent consumer price index trends could actually be considered as being deflationary for economic growth.