January 13, 2021
The CPI rose 0.4% in December after having risen 0.2% in November. It rose1.3% in 2020.
Food prices rebounded by 0.3% in December after having fallen 0.1% in November. In the past year food prices have risen 3.8%.
Energy prices jumped 4.0% in December after having risen 0.4% in November. The December increase was led by gasoline prices which climbed by 8.4%. The recent run-up in energy prices appears to be a reflection of the global economy gathering momentum. However, in the past year energy prices have still declined 7.3% because of the recession early in the year.
The CPI excluding the volatile food and energy prices gained 0.1% in December after having risen 0.2% in November. In the past year the so-called “core” CPI has risen 1.6%.
While inflation remains relatively well in check for the moment, there is no doubt in our mind that the inflation rate is on the rise primarily because of 25% growth in the money supply in the past year. Typically, M-2 rises at about a 6.0% pace. But when the Fed purchased $3.0 trillion of government securities back in the spring of last year money growth soared. A 25% increase in a year is unprecedented growth and is going to cause the inflation rate to climb in the months ahead. But while rapid growth in the money supply presages a pickup in the inflation rate, it is less clear exactly when and by how much the inflation rate will rise.
But we are already seeing signs of inflation beginning to climb. Home prices have jumped 8.5% in the past year.
Commodity prices are at their highest level in the past five years which is lifting goods prices.
The dollar has been declining which means that the prices of imported goods will begin to climb.
The CPI rose just 1.3% in 2020 while the core rate rose1.6% . We expect the CPI excluding food and energy is projected to increase 2.5% this year and then increase 3.0% in 2022.
Stephen Slifer
NumberNomics
Charleston, SC
Given the stability of these numbers, what accounts for the rapid decline in the 30 year treasury rates during the past two weeks?
Hi Frank.Thanks for your note. It appears to me that the stock and bond markets have become such strong believes that a recession is coming that they are seeking the safety of 10- and 30-year Treasury securities. And now they seem to have support from the Fed when Chair Powell talks about the potential for economic weakness ahead. The question is whether they are right. I think the economy is doing just fine and that in the months ahead inflation will works its way gradually higher. If that is the case, bond yields will begin to rise again. See the piece that I wrote this past Friday which talks about the upward revision to unit labor costs which, to me, suggests that higher inflation is ahead. Thanks for writing.
Steve
Stephen –
Per our exchange of emails a couple of weeks ago about the Federal Reserve, the following quote from the head of the Philadelphia Federal Reserve today (WSJ 1/15/20) indicates the Fed has added about $300 billion to the repo/short term market in the last 3-4 months, so somewhere between $75-100 billion net per month that is not in the revolving repo market. This would seem to be the equivalent of QE in the past, rather than just adding to the overnight borrowing pool, and therefore likely has a major positive impact on equities and other asset prices. Any thoughts on where this is going or why it’s necessary?
Frank
“These interventions have taken the Fed’s balance sheet from around $3.8 trillion in September to $4.1 trillion now. The Fed also has about $211 billion in repos outstanding as of last week, the last time the Fed provided data on its holdings.
The Fed’s interventions “clearly worked, with the effective fed-funds rate maintaining a virtually constant level since October, and repo markets staying calm. Instead of wreaking havoc, the year’s end was a nonevent,” Mr. Harker said.”