The eurozone central banks that ♥ gold…

Posted by Izabella Kaminska on Jun 15 15:34. 2 comments | Share
Bullionvault’s head of research Adrian Ash has spotted an interesting trend among eurozone central banks this year.Rather than selling gold, they’ve been buying it instead.

Not a lot.

But buying — mostly for gold coin trading purposes– nevertheless. More…

A CPI reversal of sorts

Posted by Cardiff Garcia on Jun 15 15:23. Comment | Share

DiggRedditLinkedInFacebookdeliciousMixxPropellerYahoo! BuzzstumbleupontwitterFor a change, activity in commodity prices has tempered consumer price inflation in the US, at least for a month:The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in May on a seasonally adjusted basis, More…

For a change, activity in commodity prices has tempered consumer price inflation in the US, at least for a month:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in May on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. …

The index for all items less food and energy increased 0.3 percent in May, its largest increase since July 2008.

We can’t remember the last time headline CPI increased at a slower pace than core — though we probably shouldn’t be surprised in this case, given the retreat in commodities last month. Both climbed faster than the market had expected.

And as we wrote a month ago, the divergence between the headline and core CPI, going back four years, has been mostly about the motor fuel component. That in itself is no surprise; what is surprising is how closely the rest of the food and energy components tracked the core number.

This relationship seems to have mostly held true again in May, with a healthy 2 per cent decline in gas nearly standing alone, while prices rose across most non-energy categories and fell more modestly in the rest of the energy index.

Meanwhile, the year-on-year inflation numbers continue climbing steadily for both headline and core:

Until Bernanke’s speech last week suggesting otherwise, it wasn’t unreasonable to wonder if QE3 would soon be on the table given the onslaught of negative economic indicators. Analogies to last year were starting to sound sensible.

But only up to a point, and those areas where the analogies fail also matter. Long-term inflation expectations have fallen considerably in recent months, but they remain well above where they were at the lowest point last summer. And if actual inflation accelerates, those expectations would likely rise along with it.

Here’s a chart sent to us earlier this week by analysts at JP Morgan Asset Management consisting of three variables: “inflation expectations implied by US five year / five year forward break-even rates; the correlation of global stock / bond returns; and a breadth measure of commodity prices.”

The trend has turned downward lately, but the report from JPMAM actually emphasises the ways in which the US economy now has changed since last summer, when disinflationary forces had clearly taken hold:

Our deflation alert measure summarises this difference and now suggests that deflation is not an overriding concern at the moment. Indeed, a simple Taylor rule estimate, using our trend real GDP growth assumption of 2.5% pa and a NAIRU (non accelerating rate of unemployment) of 6%, suggests that the appropriate level for Fed Funds is -0.1%, i.e. close to current levels.

Of course, the issue here isn’t a simplistic, binary one of inflation vs deflation. If inflation is sufficiently subdued and below the implicit target, then there would be room for further action even if deflation is wholly implausible.

But that’s not the case, and you don’t have to be optimistic about where the US economy is headed — we certainly aren’t — to see that current inflation trends make QE3 unlikely anytime soon. That was our reading of Bernanke’s speech last week (though in this we’re really on shaky ground and could be dead wrong).

All of this could change, obviously, particularly if unemployment continues worsening as it did last month. But for now we see no reason to believe otherwise.

Related links:
The headline-core CPI gap is all about motor fuel – FT Alphaville
A US consumption conundrum – FT Alphaville
Compartflation – FT Alphaville

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