Food and energy inflation are not transitory, prices for these goods are always rising, and their rise could help CPI beat expectations, according to Deutsche Bank’s Joseph LaVorgna.From Joseph LaVorgna:
Two, we do not believe that food & energy price gains are transitory. In fact, when we look over a several year period, we find that food and energy prices almost always rise—they only tend to fall in recessions; indeed, the last time that the combined food & energy components in the CPI registered a three-year decline was June 1988 when they fell at an annualized 0.3% over the preceding 36 months. Over the last three years, food & energy prices are up 1.9%, but over the past year, they are up 5.9%. We doubt this trend will subside in the face of negative real interest rates and a sharply falling trade-weighted dollar.
That fact, coupled with rising inflation expectations, means that tomorrow’s CPI could surprise to the upside, according to LaVorgna. And there’s another part of the CPI about to blast higher too.
However, we are worried we could see a 0.3% increase in the core, because owners’ equivalent rent (which is about 30% of the core) and rent of primary residence (which is worth another 10% of the core) could both surprise to the upside. Based on anecdotal reports, the national rental vacancy rate fell further in Q1, which should push OER higher than the 0.1% readings we have seen for the last six months.