Friday, October 15, 2010

Don't Be Fooled By Tame CPI

Today's U.S. CPI report came in below expectations, rising only 0.1% compared to the previous month and only 1.1% compared to 12 months earlier. However, you shouldn't misread this as signaling low inflationary pressures.

The relatively low increase reflects the previous tighter monetary condition, with MZM dropping roughly 2% between June 2009 and June 2010. However, since late July, money supply growth has returned, with MZM increasing 2.8% ( an annualized rate of 15.6%) in the 10 weeks between July 26 and October 4.

And with the dollar index dropping 13% since June, and with oil and other commodities increasing rapidly in value, a pick up in consumper price inflation can be expected in the coming months.