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The March CPI should have been even lower than reported



April 20, 2009 – Comments (0) | RELATED TICKERS: UDN , USO , TIP

Inflation will reappear again in the future.  It always does.  It's in the interest of an indebted government for it to exist in the long run.  For now however, inflation isn't even close to being here.  In fact, it could a while before it arrives.

In March, U.S. consumer prices (CPI) as measured by the Bureau of Labor Statistics fell for the first time since 1955.  Last week the BLS reported that the March CPI "unexpectedly" (at least unexpectedly for those in the media and economists who have no idea what they are talking about) dropped 0.1% 

While it is true that the bulk of the drop in CPI was as a result of the massive decline in the price of oil over the past year, prices are falling even faster than the "core" CPI indicates.  After backing out food and energy, the "core" CPI rose 0.2% in March.  However, according to a recent report by Maria Fiorini Ramirez titled "CPI and Manufacturing Lose Ground":

In March, an 11% m/m leap in the price of tobacco products accounted for one-half of the increase in the overall core index.

Fiotini's firm is forecasting a "shift into negative territory on a m/m rate in coming quarters and for mild deflation to become more solidly entrenched in 2010." 

What she says makes a lot of sense.  Lower prices are working their way into the system.  Low commodities prices first show up in the Producer Price Index (PPI) and then work their way down to the CPI.  Just look at what happened to the PPI in March:

Wholesale prices dropped sharply last month, a seasonally-adjusted 1.2% percent, again versus analysts' incorrect forecast of no change.  Wholesale prices are down 3.5% over the past year, the fastest drop in over 60 years.

I expect inflation to remain tame to nonexistent over the next several months as this drop in producer prices trickles down to consumers.

The strong U.S. dollar is serving as another major headwind to inflation (see article: Oil Falls the Most in Seven-Weeks as Dollar Gains, Stocks Drop).  The price of oil is down nearly four dollars so far today mainly as a result of the strong U.S. dollar, which is sitting at a one month high versus the Euro. 

As I have said in the past, people who look at the problems that we have here in the United States and think that the dollar is doomed in the near future are ignoring the fact that things are just as messed up as they are here right now in many other parts of the world, like Japan and the European Union.  As the old saying goes, "In the land of the blind, the one-eyed man is king."  The dollar isn't great, but it is the default reserve currency for the entire world...for now.

As I mentioned at the beginning of this piece, I fully expect the dollar to weaken at some point and for inflation to reappear at some point...just not as soon as many others believe.  It could be years before the dollar implodes, interest rates skyrocket, or prices soar.  The only think that I can see setting off inflation at this point is the world choking on all of the debt that the U.S. government has to issue in the near future.  I plan on keeping a close eye on the demand for Treasuries. If it appears to be weakening significantly I will revise my forecast for inflation.

I plan on increasing my exposure to the commodities sector at some point, particularly oil and natural gas, but for now I am taking a conservative approach and either waiting or buying only bonds / preferred stock in companies in the sector.  At some point at the end of this year or early next I'll give serious thought to adding common stock in the oil and natural gas sector.  Which companies depends upon what the Obama administration does with taxes to domestic oil producers.


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