For those of you worried about Inflation

by Laura Ehrenberg-Chesler on April 18, 2013

in gold,inflation/deflation

Over the past few years many professional and individual investors have worried that all the liquidity being pumped into the monetary system was going to cause hyper-inflation. As a result, the price of gold soared to the $1900/oz. level. Over the past few weeks however, the price of gold has fallen precipitously and currently trades below $1400/oz. One reason for this may be that inflation expectations, based on the numbers, are very

low. From Ed Yardeni: In a speech Tuesday, FRBNY President Bill Dudley observed: “Inflation, as measured by the personal consumption expenditure deflator, is currently well below the Federal Reserve”s objective of 2 percent. There is substantial slack in the labor market and in the markets for goods and services, and underlying measures of inflation are subdued. Moreover, people”s expectations of inflation remain well anchored at levels consistent with our 2 percent longer-run online casino objective. Thus, I conclude that the risk that inflation could significantly exceed our 2 percent objective is quite low over the next few years, even if the economy were to strengthen considerably.” Let’s have a quick look at some of the latest inflation stats: (1) Expected inflation is falling again. The spread between the 10-year bond yield and the comparable TIPS yield fell to 2.37% yesterday from a 2013 peak of 2.59% during mid-February. That brought the 10-year nominal yield back down to 1.73%. (2) Falling gasoline prices depressing CPI. Below, Debbie reports that the CPI fell 0.2% during March led by a 4.4% drop in the price of gasoline. On a y/y basis, the CPI is up only 1.5%. Excluding food and energy it is up 1.9%. Gasoline futures prices have been dropping sharply in recent days. Weighing on petroleum prices are record inventories of US crude oil . (3) Rent inflation may soon peak. Rents have been rising over the past few years as the rate of homeownership has declined. The increasing demand for rentals has attracted lots of investors buying single-family homes and renting them out. In addition, there is a boom in multifamily housing starts. The increasing supply of rental units should depress rental inflation rates around the country. (4) Inflation is tame in the G7. Of course, near-zero inflation is a widespread phenomenon among the so-called “advanced” economies of the world. The IMF’s measure of the CPI for these economies rose just 1.7% y/y during February. Not surprisingly, that matches the increase for the G7 countries. Excluding food and energy, the CPI for the G7 was up only 1.4% in February.

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