Is Inflation Really Dead?

By John Manley via

The January CPI report, released earlier this week, showed only a modest increase in consumer prices.

The year-over-year rate of headline inflation decelerated to 1.6%, with the report’s weakness driven principally by a larger-than-expected decrease in energy prices. This latest reading appears to be part of a broader trend of persistently low inflation. Nevertheless, given an economy on the verge of its 11th year of expansion, investors may want to ask themselves: is inflation really dead?

Interestingly, the details of the latest CPI report muddle the picture. Firmness in a number of components – notably, rent and apparel – helped to boost core inflation (which excludes the volatile food and energy components) to 2.2% year-over-year, much higher than the headline print. Investors may therefore want to consider the potential trajectories of the volatile food and energy components, or if broad inflation could push higher with tighter labor markets.

For the food component, the message is mixed: as a large net exporter of food, U.S. food inventories could grow dramatically in the face of higher tariffs, pushing prices lower. On the other hand, rising labor costs could flow through to higher packaging and transportation costs, pushing up end consumer prices.

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