Core Inflation Drops To 6-Year Low. Surprised?

Real-time Monetary Inflation (last 12 months): 2.0%

It's that time of the month again. For our visit with the Bureau of Labor Statistics, I mean. Yesterday, the government released the February update to the Producer Price Index (PPI) and followed on with this morning's publication of the latest Consumer Price Index (CPI).

CPI was flat last month, putting its yearlong increase at 2.1 percent. In February, declines in energy costs offset a slight rise in food prices. Taking away the volatile food and energy sectors to yield the so-called core rate, consumer prices rose 0.1 percent last month. That puts the 12-month hike in core inflation at 1.3 percent, the lowest since February 2004.

The flattening in the consumer price trend follows yesterday's reported decline in wholesale prices showing costs for finished goods falling 0.6 percent in February.

The trends in price inflation shouldn't surprise readers of this column. We track the dollar's global purchasing power against the euro-the world's second-most widely held reserve currency after the greenback-and gold in real time at the top of each Desktop article.

The HAI Monetary Inflation Index (HAI) has telegraphed turning points in domestic price inflation over the past year.

 

Year-Over-Year Inflation Rates

 

Last April's bottoming in the HAI foretold CPI's July nadir. HAI then crested in November, a month before CPI topped.

CPI and PPI are lagging indicators. They tell you of price inflation in the past. With a six-week lag, no less. HAI informs you of inflationary tendencies - and deflationary trends - in real time. Of course, it's hard to see a trend in a single day's number at the top of a column, so perhaps a little context is in order.

Since the euro was floated in 1999, HAI has grown at an average 4 percent annual rate. There have been ups and downs in the index over the past decade, but never has the index been as volatile as it has been in the past two years. It's been a roller coaster of inflation and disinflation.

 

HAI Monetary Inflation Index

 

What you see traced by the chart is the inverse of global dollar purchasing power, i.e., as the index rises, the dollar's value falls. Since December when HAI peaked near 196 (the index base is set in January 1999 at 100), the greenback's strengthened, meaning monetary inflation has moderated back to the level seen in July 2009.

The big question now is the dollar's future course. More than once, we've handicapped monetary inflation's prospects (see "Laying Odds On Inflation," for example). How would you vote with your portfolio? For inflation, deflation or stagflation?