CPI Busts Out

The Fed Funds rate is too easy if the acceleration in CPI we saw this morning represents the start of a new acceleration.

If you recall, as recently as last summer, global bond yields around the world were plunging toward zero percent or even negative on widespread fears of deflation. What a difference six months makes! Now, the big fear is exactly the opposite – global central banks, especially the US Federal Reserve, are “behind the curve.”

Here’s some data…

Reuters:

U.S. consumer prices recorded their biggest increase in nearly four years in January as

households paid more for gasoline and other goods, suggesting inflation pressures could be picking up.

The Labor Department said on Wednesday its Consumer Price Index jumped 0.6 percent last month after gaining 0.3 percent in December. January’s increase in the CPI was the largest since February 2013.

In the 12 months through January, the CPI increased 2.5 percent, the biggest year-on-year gain since March 2012.

The CPI rose 2.1 percent in the year to December.

Economists polled by Reuters had forecast the CPI rising 0.3 percent last month and advancing 2.4 percent from a year ago.

Inflation is trending higher as prices for energy goods and other commodities rebound as global demand picks up.

It’s not that 2.5% in and of itself is “inflationary”, but it’s the fact that the Fed’s stated policy objective is to pursue 2% (which they consider “steady”) inflation growth year on year.

Additionally, the size of the jump from December into January is noteworthy. You’ll see a reaction across markets today – from bonds to bank stocks to currency pairs to dividend sectors (telecom, REITs, utilities) to gold.

A look at some of the components of CPI via Bloomberg makes it clear that this is an economy-wide phenomenon:

A 7.8 percent jump in the cost of gasoline accounted for about half of the increase in the January CPI. The median forecast in a Bloomberg survey called for a 0.3 percent month-over-month advance in the CPI.

But costs of some other goods and services also moved up. Clothing prices jumped 1.4 percent, the most since February

2009. Men’s apparel surged by the most on record. New vehicle prices climbed 0.9 percent in January, the biggest advance since November 2009.

As I write, the bank stocks are indicating a new 9-year high on the open, taking out levels we haven’t seen since the 2008 crisis (and back then they were crossing these levels on the way down). The yield on the 10-year Treasury is spiking 3.4% this morning to 2.52%, a two-month high.

A well thought-out asset allocation keeps you relatively insulated from the negative consequences of faster inflation and in a position to outpace it over time, in-line with your spending needs. If you need help with this sort of planning, it’s literally what we do for a living. Talk to us here.