Inflation is on everybody’s lips these days. The amplitude of the monetary and fiscal expansionary policies in most advanced economies in response to the COVID-19 led to many economists warning against higher inflation to come.
Yesterday’s data revealed that month-on-month inflation in the United States was only 0.3%. Moreover, the core inflation or the Core CPI release, closely watched by the Fed as the metric used to measure inflation, was unchanged when compared to the previous month.
Such a report deserves a closer look because every trader in the world knows that the price of oil is on a steady rise this year. In fact, it has the best start of the year in the last three decades, and, if anything, the sharp move higher should be seen in the inflation data too.
Ignoring Food and Energy Prices
As mentioned earlier, the overall CPI last month increased by 0.3%. This follows another increase of 0.4% in the previous month, but the Fed tends to focus on the core release.
The core release totally ignores the food and energy prices. They are thought to distort the data due to their increased volatility.
A close look at the details in yesterday’s report shows why. The index covers a number of goods and services in categories such as apparel, medical care services, shelter, and food and energy prices. Out of all the items in the basket, the energy prices increased by the most. The rise in the energy prices is steady and gathers pace – from 0.7% in November to 2.6% in December and 3.5% in January. Furthermore, gasoline and fuel oil prices rose by more than 7%, respectively 5%.
Obviously, if one leaves energy prices out of the CPI, inflation is difficult to spot. But the fact is that energy prices will end up leading to higher prices. Think of a business that uses transportation to bring its goods to the market, or everything related to oil and fuel. Producers will pass their prices to consumers, and consumers will end up paying more. Only then, the overall inflation or CPI will rise.
As pointed in yesterday’s report, the trend has already started. It is only a matter of time to see the main CPI rising more than the market expects.