Tuesday, June 17, 2003

Is the deflation dragon slayed? It seems Wall Street thinks so, what with the 0.0% change in CPI in May and the +0.3% change in core CPI. Housing and medical care seem to be leading the inflation train this month, with deflation in transportation, apparel, and education & communication. As a result, as the FT explains
The dollar firmed to its best levels of the day on Tuesday after an surprise bounce in inflation eased deflation fears and lowered expectations the Fed would cut rates by a half point next week.
But the US stock markets have already priced in a 25 basis point decline. If the Wall Street analysts are correct, we should see the stock market rally screech to a halt next week if the Fed does not lower rates. All the more reason to expect a rate cut? To see clear evidence of irrational exuberance if the cut doesn't come but the market continues to soar anyway?

What is really saving the US from deflation is the country's service-based economy. In the seasonally-adjusted CPI for March-May 2003, commodities turned in a stunning -5.2% rate; services, +3.8%. The US is clearly not out of the deflation woods yet, however. Core CPI for March-May 2003 was +1.0%; Dec. 2002-May 2003, +1.3%; June-Nov. 2002, +1.9%. The closer we come to the present, the lower the inflation rate.

Interestingly, the eurozone countries exclude housing prices from their favored inflation measure, the harmonised index of consumer price inflation (HICP). Considering housing is the key sector of growth and inflation in the States, it would interesting to see what an HICP value for the US would be.


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