Whiffs of Inflation?

The Associated Press reports, US producer prices jump; hint of rising inflation:
The prices that U.S. companies receive for their goods and services rose in April by the most in 19 months, a sign that inflation may be picking up from very low levels.

The producer price index rose a seasonally adjusted 0.6 percent from March to April, the Labor Department said Wednesday, after a 0.5 percent increase from February to March. April's increases were led by higher food prices and greater retailer and wholesaler profit margins.

Over the past 12 months, producer prices have risen 2.1 percent, the biggest 12-month gain in more than two years. That figure is roughly in line with the Federal Reserve's 2 percent inflation target. The producer price index measures price changes before they reach consumers.

Excluding the volatile categories of food, energy and retailer and wholesaler margins, however, the month-to-month increase in April was smaller: Core prices rose 0.3 percent from March.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted that the profit margins dropped sharply over the winter before increasing in the past two months, "so we can't yet say an upward trend is emerging."

Still, the report suggests that inflation may be picking up after coming in below 2 percent for two years. That could reflect better economic health: Higher inflation is generally a sign of rising consumer demand.

Paul Dales, an economist at Capital Economics, noted that a sharp gain in profit margins for machinery and equipment wholesalers drove overall margins higher. That's a sign that companies are stepping up their purchases of large equipment after a weak first quarter, Dales said.

A key question is whether the sharp increases in producer prices of the past two months will flow into consumer prices. Wage increases have been weak, and unemployment remains high at 6.3 percent. The squeeze for consumers means that manufacturers and retailers haven't been able to raise prices much. April's consumer price index will be released Thursday.

Dales forecasts that consumers will pay a bit more by 2015.

"We are expecting the stronger economic recovery and rising wage growth to push core (consumer) inflation above 2 percent next year," he said.

The two months of big increases have lifted wholesale inflation from historically low levels. The producer price index rose just 1.2 percent in 2013 after a 1.4 percent increase in 2012.

Food costs jumped 2.7 percent in April, the highest in more than three years, driven by an 8.4 percent increase in meat prices.

Profit margins received by retailers and wholesalers rose 1.4 percent in April, the same as in the previous month. Margins are rebounding after sharp drops over the winter months. Profits had been held down by discounting after the winter holidays and by harsh weather in January and February that kept shoppers at home.

Low inflation has enabled the Fed to pursue extraordinary stimulus programs to try to boost spending, hiring and economic growth. It has begun to unwind some of its stimulus, cutting its monthly bond purchases to $45 billion from $85 billion last year. The bond purchases are intended to lower long-term interest rates.

But the Fed has kept the short-term interest rate it controls at nearly zero since December 2008. Higher inflation could raise pressure on the Fed to increase that rate earlier than it had planned.
The Dow Jones Newswires reports, US CPI lifts to 0.3% in April:
US consumer prices advanced in April at their strongest rate in nearly a year, a sign of modestly increasing inflation pressures in the economy.

The consumer price index, a gauge of what households pay for everything from rent to rice, increased a seasonally adjusted 0.3 per cent in April from the prior month, the Labor Department said Thursday. It was the largest gain since June 2013. So-called core prices, which strip out volatile food and energy costs, rose 0.2 per cent last month.

Both gains matched expectations of economists surveyed by The Wall Street Journal.

April prices were up 2.0 per cent from a year earlier compared with the 1.5 per cent annual advance in March. The gain reflects steady price increases since last spring when consumer costs fell due to temporary factors such as government cuts to health care payments.

Federal Reserve Chairwoman Janet Yellen told lawmakers last week that the central bank is "monitoring inflation developments closely." Inflation has been running below the Fed's 2 per cent annual inflation target, as measured by the personal consumption expenditures price index. That separately calculated gauge rose 1.1 per cent in March from a year earlier.

Low inflation is a sign of a sluggish economy with slack in the labor market and weak demand putting little pressure on prices. A pickup in inflation could suggest the economy is gaining steam.

The path of inflation could influence the Fed's strategy for winding down bond purchases this year and for when to start to raising short-term interest rates. Ms Yellen said the current near-zero rates will be in place for a "considerable time" after the bond-purchase program ends.

April's price gains were largely driven by increased costs for staples such as gasoline, food and shelter.

Seasonally adjusted gasoline prices rose 2.3 per cent in April, the largest monthly jump since December. Still, gasoline prices are up just 2.4 per cent from a year earlier.

Food prices rose 0.4 per cent last month, the fourth straight increase. Meat prices posted their largest gain since 2003 and fruits and vegetables also cost more.

Shelter prices, which account for almost a third of the total index, rose 0.2 per cent last month.

Electricity costs fell 2.6 per cent in April, the biggest one-month drop since 1986. Much of the decline can be attributed to "climate credits applied to utility bills in California," the Labor Department said.

Medical care prices rose 0.3 per cent last month and are up 2.4 per cent from a year earlier. Last year, medical inflation fell behind the pace of overall gains. However, that trend has reversed in recent months, coinciding with some eight million Americans signing up for insurance coverage made available under the new healthcare law.

A separate Labor Department report Thursday showed inflation-adjusted average weekly earnings decreased 0.3 per cent in April from the prior month. The decline reflects flat wages and accelerating inflation.
Whiffs of inflation have gotten everyone nervous that the Fed will rein in their bond purchases at a more aggressive rate and even start raising rates in 2015. I say "bullocks!". Stocks are getting slammed hard in what is a clear overreaction to the inflation data.

If you want to know where inflation is really heading as well as short-term rates, just have a look at the 10-year U.S. Treasuries where yields keep falling, even after the strong inflation reports. The 10-year yield now stands at 2.5%, which is a six-month low.

Why is the stock market overreacting to inflation data while the bond market is clearly unimpressed? Because stock market participants are collectively stupid and when it comes to discerning economic trends, the bond market gets it right.

There is no inflation. Nothing has changed since I wrote my outlook 2014. Sure, the big unwind has clobbered every momo playing high beta stocks, but there is still plenty of liquidity in these markets to drive risk assets much higher. In fact, I wouldn't be surprised to see biotechs (IBB and XBI), small caps (IWM) and technology shares (QQQ) rally very hard in the second half of the year.

Folks, there is no inflation. If anything, the biggest risk remains that we're heading toward a protracted period of debt deflation, which will expose many naked swimmers. Look at what is going on in the eurozone where anemic growth is leading to dangerously low inflation. Gold prices and shares will surge higher once the ECB gets cracking on quantitative easing.

But the problem isn't just in Europe. Even in the U.S., where an economic recovery is slowly taking hold, there is a serious threat of deflation. I was talking to a buddy of mine this morning. He told me that "cheap money for hedge funds and pension funds" is starting to be counterproductive. He added: "credit remains very restrictive for the masses which is why inflation will remain subdued for years to come."

I agree, while the 1% are the ones that profit from all the cheap money, the masses are being crushed under piles of debt. There is a private debt crisis and a jobs crisis going on which is why I take all these upticks in inflation with a shaker, not a grain of salt. I do my groceries too and have seen my grocery bills surge over the last year but that is a transient thing, which is why economists typically look at inflation trends ex food & energy.

Bottom line is there is too much debt out there and until you see a significant drop in the long-term unemployment, and a commensurate and sustained rise in wages, you can forget all about inflation. And if there is a crisis in China, you will see lower import prices which will reinforce deflationary headwinds. This is why I think all the talk of Fed tapering is way overdone. In fact, I expect the Fed to step up its bond purchases if an emerging market crisis unfolds.

I was talking to another buddy of mine on how credit card companies are making a killing in this environment. Check out shares of Mastercard (MA) and Visa (V) over the last five and ten years. It's the biggest racket on earth, even more so than the great hedge hedge fund mystery. Charging customers 20%+ interest rates in this environment is legalized loan-sharking but powerful lobbies are making sure that the government doesn't intervene.

Below, a great interview. CNBC's David Faber speaks to John Burbank, Passport Capital founder & CIO, about why he believes poor liquidity in the equity markets remains the most misunderstood and biggest risk factor facing investors.

This follows hedge fund guru David Tepper saying don't get too freaking long in this market. He's nervous about a lot of things I discuss above but I bet you he's using the latest selloff to crank up risk assets. The second half of the year will be very interesting.