The trends are very favorable. In fact, apart from some pressures in
January and February, when inflation rates tend to pick up a bit, there is
little sign of inflationary pressures.
The annual rate of increase in the core CPI over the seven months is about
1.9%. The annual rate of increase in the core PCE over the six months
(May data will be out on June 29) is just 1.4%.
He also writes that energy does not change the picture:
The year-over-year increase in total CPI stands at 2.7% compared to the 2.2%
increase in the core rate. The year-over-year increase for the total PCE
deflator is only 2.2% compared to the 2.0% core increase.
A spike in energy prices the past three months has pushed the total indices
higher than the core rates, but the impact has not been huge from a broader
The entire article is worth reading carefully.
The implications of the inflation trend were noted on the Wall Street Journals Economics Blog. Greg Ip writes that the numbers are so good that the Fed may have to change the language of their statement.
Those focused on the headline CPI instead of the core rate have emphasized the trends in food and energy. We have written about this divergence in an article aimed at the individual investor and a follow-up.
Now let us look ahead. The energy futures market sees current prices as the new norm. The forward curve shows a pretty flat picture, indicating that the big-money traders at the NYMEX see modest increases in prices for years ahead. If they are correct, the headline inflation numbers will stabilize.
For energy to be a continuing source of inflation, oil prices must move higher. Those who are highlighting this concern can make their bets by going long oil futures. This is a more direct way to profit than trying to predict an economic collapse and going short on equities.
Full disclosure: We continue to believe that "upstream" energy companies are dramatically undervalued, so we hold Transocean, Inc. (RIG) and Global SantaFe (GSF).