While we should all welcome this week’s tamer than expected inflation data (bonds, gold, and emerging markets bulls, and dollar bears, certainly have), 

Core Consumer Price Index (excludes food and energy)



Producer Price Index



we should view it with a heavy dose of caution.


As we’ve been discussing herein, while we see nothing that points to dangerously high/expansion-choking inflation on the horizon, we do see a bit more than recent headline numbers would suggest.


Along with recent survey data that sees production input prices rising virtually across the board, other metrics conflict a bit with this week’s PPI and Core CPI numbers.


Here’s our chart of the New York Fed’s Underlying Inflation indicator along with the Consumer Price Index (including food and energy):



The five red horizontal lines in the above 20-year chart show peaks in the underlying inflation gauge. Notice in all but one instance (white circle) the CPI ultimately either met or exceeded the high set by the gauge; suggesting that 3+% inflation in the not too distant future is not at all out of the question.


Such a move in inflation, at this juncture, wouldn’t be a bad thing (save for the more interest rate sensitive asset classes) per se, it would simply add confirmation to what our macro analysis tells us about current conditions.