Don’t Fear Inflation

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Crude oil prices have rebounded to over $50/barrel, and gasoline prices have followed suit. Nevertheless, oil consumed per unit of GDP in the U.S. (oil intensity) has declined for many years.

The December NFP report seemed to underperform a bit at 148k (vs 190k expected), but November was revised up to 252k from 228k. Net/net, that’s about a two-month miss of just 18k - with the big hit coming from retail hiring, off 27k on a seasonally adjusted basis. Average hourly earnings growth was up 2.5% YoY, maintaining the drop from late 2016. On a three-month moving average basis, wages are up 2.4% YoY. That doesn’t look like a big risk of a wage-induced inflation run.

Yes, the ISM Business Prices index has been ratcheting higher, reaching 69 in December but actually down from 71.5 as recently as September. Note that there is a relatively reliable relationship between oil prices and ISM Business Prices – after all it’s a measure of prices facing business and oil prices are up by nearly 50% since summer lows. It’s likely that the Fed will remain focused on core prices. In the paradigm I follow, relative prices change but when monetary policy is stable there is no inflation. That is, rising oil prices (and we do have stable monetary policy if not tighter) should work to contain inflation in other sectors. So, higher energy prices are likely to keep down the core even if higher oil prompts an uptick in the headline rate. At any rate, Friday 1/12 brings the December CPI and real average weekly earnings readings. With the core below 2% and the latter below 1%, I doubt that we see pressure on the Fed to speed up its policy moves.

Please take a look at page 62 of the Global Perspectives™ book for more information on Oil Price and Intensity.

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