Inflation Watch: FOMC

The Fed finishes the second day of a 2-dayer, and we are widely expecting a "nuthin’ done" at 2:15. Barring some religous conversion by a majority of Fed members, we will also get the usual boilerplate that the risks between slowing growth and inflation are "balanced."

We know growth is slowing, and we know inflation is "elevated" — but by how much? Here’s two tidbits worth considering.

The first, via Tickersense, is a breakdown of the components of CPI:

Cpi_attribution_chart_0207

Note how over the past year, the Food & Beverage component has expanded. Also noteworthy: how understated the Medical Care portion of CPI actually is. We know that medical costs, prescriptions, hospital stays, insurance, et. al. have been rising at 10%+ per annum. Lastly, the Shelter portion has actually been understated over the past 10 years due to OER (Owner’s Equivalent Rent); Now, it may be slightly overstated.

Tickersense notes: "Over the last seven years, overall prices as measured by the CPI have
risen about 21%.  Of that gain, the cost of shelter is responsible for
over 40%, followed by transportation and food and beverages, with each
comprising about 14% of the total gain."

The second factor the Fed should be mulling over is the global nature of inflation these days. In the UK, the most recent data showed surprising strength in price increases, with inflation pressures being called "persistent."

Bloomberg reported:

"U.K. inflation unexpectedly accelerated in February to the second-fastest pace in a decade, strengthening the case for a further interest-rate increase from the Bank of England.

Consumer prices rose 2.8 percent from a year earlier as air fares and food costs climbed, the London-based Office for National Statistics said today. Economists expected 2.7 percent, the median of 39 forecasts in a Bloomberg survey showed.

The pound rose as investors speculated the central bank will raise borrowing costs again to bring inflation back to the 2 percent target this year. The Bank of England has increased rates three times since August as surging home values encouraged consumer spending, fueling price pressures in Europe’s second- largest economy."

Along with the rest of the world’s central bankers, U.K. policy makers have raised borrowing costs — they are at 5.25% (like the US). Investor in Great Britain widely expect to see a hike to 5.5 by June. The ECB is at 3.75%, while the Bank of Japan is at 0.5%.

Todya’s FOMC decision will be released at 2:15pm . . .

>

Sources:
European Economies: UK Inflation
Rate Increased

Brian Swint and Craig Stirling
Bloomberg, March 20 2007
http://www.bloomberg.com/apps/news?pid=20601087&sid=aESlNEfb5uUk&c

What’s Driving the CPI
Tickersense
 
http://tickersense.typepad.com/ticker_sense/2007/03/whats_driving_t.html

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