In December, BI’s Joe Weisenthal wrote that it was time to start thinking about inflation again.
The argument was this: for years, a cavalcade of doomsayers have argued that hyperinflation was right around the corner, but that hasn’t been the case.
Take a look at the year-over-year change in the consumer price index:
While CPI has remained muted in 2014, there’s is now some evidence that elements of the inflation story may be changing. Namely, housing inflation, health care inflation, and wage growth may be poised to accelerate.
And that story is important to market participants, as the Federal Reserve has put increasing emphasis on inflation in setting its forward guidance for the likely path of short-term interest rates.
As the Wall Street Journal’s Kathleen Madigan highlighted, the CPI report may have been pretty tepid, but the pace of housing inflation has picked up.
“By January, [owners’ equivalent rent] was up 2.5% compared to year-ago levels,” writes Madigan.
“That’s not a hot pace for housing costs (they were increasing at a yearly pace above 4% in early 2007). But since OER accounts for nearly one-quarter of the entire CPI, a pickup in that category will provide a lift to total inflation.”
Health care inflation
Health care inflation has also begun to accelerate, as Joe LaVorgna, chief U.S. economist at Deutsche Bank, points out.
“The price of selected health care industries rose +0.3% in January following gains of +0.2% in December and +0.3% in November,” wrote LaVorgna in a recent note to clients, illustrating the rise in the chart below.
A new paper from the New York Fed suggests that the short-term unemployment rate is a better predictor of wage growth than the headline unemployment rate. And both short-term unemployment and wage growth continue to improve, suggesting that — if the Fed takes the conclusions of this paper into consideration — it may need to adjust rates sooner than some market participants expect.
These ideas are starting to gain traction among market economists. UBS chief economist Maury Harris looked at this back in November, writing in a note to clients:
The y/y percentage change in the core PCE deflator has decelerated by 52bps through September. That deceleration has been the result of sharp drops in medical goods, health care services and financial services inflation. Combined, these account for almost all the deceleration witnessed over the last year. However, these now seem to be showing signs of re-acceleration. From June to September, the 3-month annualized rate of change for medical goods inflation has jumped from -0.4% to +4.8%, health care services have risen from -0.5% to +1.3%, and financial services inflation has bounced from +0.2% to +2.6%. We expect core PCE inflation will end 2014 at 1.9%, almost on the FOMC’s target.
All of this is to say that inflation may become a bigger part of the monetary policy story this year as the Federal Reserve weans itself off of quantitative easing and allows forward guidance to assume a larger role.
So stay tuned.
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