Inflation and Disinflation, Sept 2007

These days, there's a big disconnect among inflation watchers.  Those who weigh gold and oil prices heavily are waving red flags, because those commodities are at or near all-time highs.  On the other hand, both have been high for months, but haven't translated (yet) into higher prices across the broad baskets of consumption items.  In fact, the measures for personal consumption expenditures have been indicating disinflation for about a year.  Here's the monthly chart; click to enlarge:

The PCE inflation (red) indicates today's and yesterday's inflation.   Gold, oil, and also the TIPS spread (blue), in theory, indicate future inflation.  (The tiny gold market and the huge oil market are both predicting inflation, but the huge bond market is not.)  We'll know in 6 to 9 months how reliable each of those three predictors turned out to be, because that's how long it takes for the Fed's monetary policy to play out.  In the meantime, disinflation is what we are currently experiencing for consumption items; that combined with housing asset price deflation is why I think the Fed did the right thing by loosening, which is a recession-prevention move.   

=============
For those interested in the PCE numbers above, here are three links:

• The latest results
• A simple explanation
• A more detailed explanation

Comments

[dblwyo]

Excellent post...and interesting. Recently took a pass myself using YoY% changes which indeed show very similar results to both the Dallas Fed's and the bond markets. If you'd care to it's here: http://tinyurl.com/327bdt