Wednesday, December 15, 2010

HOT: Atlanta Fed Warns on Strongest Inflation in Almost Two Years

Forget the surrealist numbers coming out of the Bureau of Labor Statistics,  there's a more fascinating set of numbers put out by the Atlanta Fed, sticky price inflation numbers. I'll let them explain what that means:
 In recent work, we used data on the price flexibility of specific goods to separate the CPI into two components: a flexible-price CPI and a sticky-price CPI. What we found was that flexible-price goods represent roughly 30 percent of the CPI market basket, and these goods tend to respond to the state of the economy. However, the sticky-price goods that make up the remaining 70 percent of the CPI market basket don't appear to respond to economic conditions...

But what the sticky-price CPI lacks in responsiveness to the economy, it seems to make up in terms of its ability to capture inflation expectations. In other words, the sticky-price CPI seems to be more forward looking.
So what is this sticky indicator showing? The highest inflation trend in almost two years. Here's the Atlanta Fed again:
The sticky price CPI, based on CPI data that change relatively infrequently, rose 1.7 percent (annualized) in November, its strongest pace in almost two years. The sticky price CPI and the core sticky price CPI (also up 1.7 percent in November) had risen less than 1 percent (annualized) in 12 of the previous 13 months.
Remember, there is no 100% foolproof economic data that will always forecast the economic future, since there are no constants in the world of economic, but intuitively, slowing moving prices seem to be an indicator that is not likely to go off track very often. Thus, this appears to be a very interesting indicator of the inflation I expect next year.

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