Deutsche Bank: "It's Not Just Food And Energy Inflation Anymore"

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Photo: Deutsche Bank

The inflation problem is now moving beyond food and fuel and starting to impact the core, according to Deutsche Bank’s Carl Riccadonna.Riccadonna breaks down the inflation problem noting that, while some of what’s happening right now is the result of bleed through from fuel costs to other portions of the economy, the inflation uptrend is also the result of improving economic conditions and rising demand.

From Carl Riccadonna:

Accelerating wage and salary gains will support higher prices, and in turn the recent jump in inflation expectations is likely to be sustained to a greater degree than some policymakers—who are more wary about economic prospects—anticipate. As core inflation nears the upper end of the Fed’s comfort range later this year, sentiment on the FOMC will drift increasingly toward a policy recalibration—this is already surfacing in the increasingly vocal discomfort expressed by the more hawkish-leaning Fed officials.

We can expect the hawkish comments from Fed members, which really took hold in the last few weeks, to grow in the coming months as this new inflation reality becomes more entrenched.

This is no longer just an issue of energy price increases.

Annualized CPI is a full percentage point ahead of Q4 2010.

Even when adjusted for volatility, the inflation upturn is still substantial.

Core CPI also rising, with its 19 categories rising with a 60% correlation. Not in lock step, yet.

And now, expectations are catching up to the new inflation reality.

Worried about what shock might hit the economy next?

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