« Stagflation? You can't be serious! | Main | India: An economy unshackled »

Thursday, June 22, 2006

Comments

Arthur Eckart

The article below explains there are at least three factors contributing to inflation. Also, I may add, stagflation is slowing growth and higher inflation. So, the U.S. is in a stagflationary environment, although growth remains high and inflation is still tame. Moreover, NAIRU (the non-accelerating inflation rate of unemployment) is estimated to be 5%. However, the unemployment rate is 4.6%. Furthermore, the capacity utilization rate has steadily increased, which may contribute to inflation.

By Tony Crescenzi
RealMoney.com Contributor

5/16/2006 2:32 PM EDT

Times have changed in the housing market and this should, hence, boost the CPI in the months ahead. The boost is already occuring: Owners-equivalent rent, which represents 23.4% of the CPI, posted a gain of 0.4% in March, the most since December 2001. It has increased 0.3% or more three times over the past four months, after having increased 0.2% for nine straight months.

The housing component represents about 43% of the CPI, most of which relates to rental costs. In fact, by themselves, rental costs account for 30% of the CPI.

Rental costs are currently on the rise, and they probably will be for many more months. The slowdown in the housing market is boosting demand for rental units, which is boosting rental costs. This is the opposite of the pattern seen during the boom period for housing, when strong demand for new and existing homes drove down demand for rental units and suppressed the CPI.

Another upside risk to the CPI relates to labor costs. The year-over-year change in average hourly earnings reached 3.8% in April, the most in five years and above the 15-year average of 3.2%.

And finally, the commodity rally adds to the upside risks, of course.

A 0.2% gain is expected in the core CPI. Until commodity prices show a more lasting period of moderation, any gains larger than the consensus forecast will be bearish for stocks and bonds. Of course, if commodities continue their most recent correction, investors won't sweat bad news on inflation so long as they feel the situation will improve in future months. In other words, if, for example, commodities were to fall -- copper goes from $4 per pound to $2 per pound -- a higher-than-expected CPI wouldn't hurt the markets much.

Conversely, if these data are received in the midst of a new leg upward in commodity prices and amid renewed weakening in the dollar, a benign inflation reading wouldn't help the markets much.

baby gates for stairs

The boost is already occuring: Owners-equivalent rent, which represents 23.4% of the CPI, posted a gain of 0.4% in March, the most since December 2001. It has increased 0.3% or more three times over the past four months, after having increased 0.2% for nine straight months.

The comments to this entry are closed.

Information




  • TEST


  • Subscribe in NewsGator Online

Economist Weblogs

Categories

Disclaimer


  • This is a personal web site, produced in my own time and solely reflecting my personal opinions. Statements on this site do not represent the views or policies of my employer, past or present, or any other organisation with which I may be affiliated. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.