Dave Altig, over at the always excellent macroblog, has an interesting post with a round-up of the recent inflation report.
Altig is eminently more qualified than I to discuss the details of inflation reporting. Suffice it to say, the news is not looking good on that front, and it is making it increasingly less likely that the Fed will lower short-term rates. A lot of the recent market talk has focused on the idea that inflation will fall exogenously because of slower growth. Suffice it to say, this is not proving to be the case. My thinking is not fully fleshed out, but taking a look at the CPI, I pulled out some components, as proxies for the tradable goods sector, and for the protected sector. I pulled appliances, machine tools, shelter and education. Appliances and machine tools are very open to foreign competition, and education and shelter are not (for obvious reasons). Education costs are an old story, and as expected have been increasing on average over 6% a year. Shelter, though is weighted as a fairly large portion of the CPI. For a while, it seemed to increase at about the general rate of inflation. Then recently, particularly in the second half of 2006, that rate of increase shot up averaging 4% for the last six months. For the first two months of the year, it is an excess of 4%. As has been noted previously, shelter costs are lagging, so that inflationary pressure will likely subside by the second half of 2007. Still, for me the more disturbing trends was the proxy variables for appliances and machine tools. This tells me that import pricing, which has been a deflationary drag on the overall CPI is no longer helping out, and because of that, inflation risks remain to the upside. Those betting on a fed rate cut anytime soon, do so at there own risks. I have been an optimist up to this point on the fate of the economy, but numbers like these don't help the case. The imbalances being built up by China and to a lesser extent Japan (via the carry trade) are beginning to show up outside of the commodity markets.