All three PPI measures have their 6 month rates of change well above the 12 month rates, so the trend points toward even higher inflation ahead.
Given global economic recovery, and Fed action meant to stimulate the U.S. economy, we expect that inflation fires will heat up significantly in 2011.
By keeping interest rates at extreme lows and printing money, the Fed is trying to reflate, convincing consumers to spend, not save and investors to buy riskier assets.
Commodities are on fire, and it’s not just because of the weaker dollar. Commodity prices are signaling significant pass-through inflation pressures building.
We see the perceived deflation threat developing into commodity-based inflationary fears.
Commodity Diffusion Index pointing toward higher inflation. While weak dollar has helped push commodity prices higher, a Diffusion Index converted to a strong currency like the Swiss Franc also is at very high inflationary levels.
Commodity Diffusion Index pointing toward higher inflation.
We are maintaining our 2010 CPI estimate of +1.2%. (Core CPI +0.9%.)
It may feel like a deflationary environment, but the CPI is not likely to end 2010 with a twelve month deflationary reading.
Looking ahead to 2011, we are keeping a close eye on Housing, Food and Wages, which all could be bottoming out.