The inflation dragon is yet to be slayed. The latest reading of US consumer prices shows the positive impact of lower global oil prices, but other items in the inflation basket continue to push higher.
So, while US inflation has peaked at a headline level, underlying inflation remains too high and the road back to low and stable inflation is potentially long and uncertain. Market optimism in this regard was harshly dashed last week. Equities slumped, bond yields rose, and the dollar resumed its upward march.
Gimme shelter
A big part of the inflation story in the US is housing, since housing (or shelter as it is called) is the biggest single component of the US consumer price index with a 33% weight. Since the consumer price index measures consumption not investment, the shelter component is the rent people pay to landlords as well as the imputed rent homeowners owe themselves (known as owner’s equivalent rent). In the case of the US, both actual and owners’ equivalent rent have been increasing at a rapid pace at 6.7% and 6.3% respectively. This is a long way from the Federal Reserve’s target of 2% average inflation over time.
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