Inflation Watch:  Core high, headline to rise further

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Executive Summary:

 

*All measures of inflation have accelerated. CPI inflation has risen to 7.9% yr/yr and 6.4% excluding food and energy. PCE inflation has risen to 6.1%, and 5.2% on its core.  Producer price indexes are rising even faster.  Inflation is the highest since the early 1980s. 

 

*Our detailed analysis of price increases of over 200 components of the CPI indicates a further widening distribution of accelerating price increases across goods and services (See Chart 1).  The portion of CPI components experiencing inflation above 3% and above 5% are similar to the early 1970s, but not yet as high as the late 1970s. 

*Average hourly earnings (AHE) increased 5.1% yr/yr in February, but real wages are declining.  Extremely tight labor markets and the feedback of inflation on wages should keep nominal wage increases elevated.

 

*Inflationary expectations for the near and intermediate term are quite high according to both survey and market-based measures.   Market-based measures of longer-run inflationary expectations between 6-10 years remain only moderately above the Fed’s longer-run 2% average target. 

 

*The negative supply shock stemming from the rise in oil and commodity prices will boost headline inflation in coming months.  While core inflation seems to be showing signs of peaking, elongated constraints on supply and higher inflation may push up inflationary expectations and inhibit desired declines in core inflation.

 

Chart 1: Distribution of inflation across CPI components 

 

 

Mickey Levy, mickey.levy@berenberg-us.com

 

Mahmoud Abu Ghzalah, mahmoud.abughzalah@berenberg-us.com

 

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