Inflation: U.S. Consumer Price Index to Drop in June
The US consumer price index rose significantly to 3.44% in May from a year ago and 0.2% from its April level. The increase was bang on target with my estimate. However, I believe that May's figure on a year-ago basis approached a plateau in the current cycle.
My analysis indicates that changes in the CPI inflation rate on a year-ago basis and especially CPI ex shelter are explained by changes in the oil price compared to a year ago. It is particularly evident since the end of 2006 where more than 94% of the direction of the CPI ex shelter is explained by the year-on-year absolute change in the price of crude oil.
Sources: I-Net Bridge; Plexus Asset Management.
Shelter's weight of approximately 32.3% in the CPI and the one-month lag between the change in the oil price and CPI ex shelter inflation enables me to make a reasonably accurate forecast. The change in the oil price is a known factor while the only unknown factor is the CPI shelter CPI. But with a more stable trend the CPI shelter CPI inflation rate that can be expected is fairly reasonably assumed.
Sources: Bureau of Labor; Plexus Asset Management.
The year-on-year change in Light Louisiana Sweet crude in May was $41.53 per barrel. The historical relationship between the change in the Light Louisiana Sweet crude and the CPI ex shelter inflation rate points to a year-on-year CPI ex shelter inflation rate of 4.77% in June given the said lag. That makes up 67.7% of the overall CPI inflation rate (overall CPI minus the 32.3% weight of the shelter CPI) and will therefore be 3.23%. If I assume a year-on-year change of 1% in the shelter CPI, May's total CPI will add up as follows:
(67.7% of 4.77%) plus (32.3% of 1%) = 3.23% plus 0.32% = 3.55%.
The 3.55% inflation rate means that the consumer price index will drop by 0.1% in June. The first decline since June last year!
But where is CPI inflation heading?
Without taking a stab at where the oil price is heading, I looked at three scenarios where the price per barrel of Louisiana Sweet crude was kept constant at $100, $115 (current) and $130 respectively for the next 12 months. The monthly oil price was then compared to the price a year ago and depicted against the CPI ex shelter inflation rate lagged by one month.
Sources: Bureau of Labor; I-Net; Plexus Asset Management.
By applying the historical regression equation the trend of future CPI ex shelter year-on-year inflation is as follows:
Sources: Bureau of Labor; I-Net; Plexus Asset Management.
Assuming that the year-on-year inflation rate for shelter remains steady at 1.0%, the outlook for the overall CPI inflation rate is as follows:
Sources: Bureau of Labor; I-Net; Plexus Asset Management.
| Year-on-year CPI inflation Rate % | |||
| @ constant $115/barrel |
@ constant $130/barrel |
@ constant $100/barrel |
|
| May-11 | 3.44 (actual) | ||
| Jun-11 | 3.55 | 3.55 | 3.55 |
| Jul-11 | 3.32 | 4.03 | 2.61 |
| Aug-11 | 3.15 | 3.86 | 2.44 |
| Sep-11 | 3.44 | 4.15 | 2.73 |
| Oct-11 | 3.01 | 3.72 | 2.30 |
| Nov-11 | 3.02 | 3.73 | 2.31 |
| Dec-11 | 2.85 | 3.56 | 2.14 |
| Jan-12 | 2.51 | 3.22 | 1.80 |
| Feb-12 | 2.11 | 2.82 | 1.40 |
| Mar-12 | 1.55 | 2.26 | 0.84 |
| Apr-12 | 1.35 | 2.06 | 0.64 |
Sources: Bureau of Labor; I-Net; Plexus Asset Management.
It is evident in the above that the US CPI inflation rate is likely to peak at 3.55% in June if the oil price maintains its current level or weaken. Even if the oil price spikes to $130 per barrel and maintains that level, the inflation rate will still top out in July this year. There may be a short further spike in September owing to a brief drop in the oil price in August last year.
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Author: Prieur du Plessis
Dr Prieur du Plessis
investmentpostcards.com
With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.
He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).
Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.
Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.
Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.
In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).
Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.
Copyright © 2008-2012 Dr Prieur du Plessis
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