Understanding the recent uptick in inflation and inflation expectations is to know two key factors that have made a turnaround, according to Barclays Capital’s Peter Newland.
Those two key factors are shelter and durable goods. In the case of shelter, we’ve seen a turnaround from the disinflationary pressures the sector provided during the recession and in its direct aftermath. Earlier this week, Deutsche Bank’s Joseph LaVorgna pointed out that rental prices were rising, and that was going to continue to push shelter prices higher in terms of the CPI.
In terms of goods, durable and otherwise, disinflationary pressures from lower cost production environments like China are disappearing at the same time the dollar is being weakened. And that’s leading to cost increases.
From Peter Newland:
A related issue is that of exchange rate pass-through. Economists at the Bank of England have found that the pass- through to consumer prices from the depreciation of sterling during the recession was much more significant than pre-financial crisis studies would have estimated.3 In addition, Gopinath and Itskhoki (2010) find that the long-run exchange rate pass-through is higher for goods with more flexible prices. Therefore, the decline in the dollar exchange rate could boost inflation in durable goods prices (which are relatively flexible and have a relatively high import intensity). In the short term, as well, PPI data suggest that deflation in durables good prices has stabilised (Figure 3), so we doubt that this component will be a significant drag on the core CPI this year or next.
So there’s little reason to suspect that durable goods or shelter prices are going to start falling again anytime soon and that should keep CPI rising.