USA inflation in 2015

[jaichind]

One interesting thing I noticed (for a few months now) is that economists projection of USA 2015 CPI is around 1% while swap traders that trade inflation swaps seems to project USA 2015 CPI will be around -0.1%.  We will see who is right.  But there is a very large gap which indicates a high level of uncertainty with respect to what the impact of lower energy prices will have on overall price levels.  Even among economists the SD of the predictions seems to be quiet large with a good segment actually coming in with numbers similar to that of swap traders.  I am keeping my fingers crossed for lower inflation (my preference) and hope that the swap traders are correct.  We will see.

[jaichind]

Energy prices affects all sorts of retail prices since it impacts the cost of transport.  And yes, it will affect the overall inflation expectations which is what the inflation swaps traders expect and what I hope.  My hope for the Fed is that their target should be 0% inflation and not 2% (not that they will get there in the next couple of years.)

[jaichind]

Looks like swap traders and economists are beginning to converge to around 0.4% to 0.5% CPI for 2015. My ideal inflation is around 0% year in year out but I will take this.

[jaichind]

As I mentioned before, the inflation swap market and the economist forecasts have converged to around 0.4%-0.5% CPI.  Of course there is still a gap for 2015 and 2016 CPI.  The swap traders have them around 1.8% while the economist forecasts have them around 2.2%.  I guess if the 2015 CPI projections is any guide they will also converge to somewhere in the middle which would be around 2%.

[jaichind]

It's healthy for the economy as a whole.

But jaichind is a sociopathic One Percenter who may have structured his portfolio in such a way that nonexistent inflation or slight disinflation would be ideal for him. And everyone else can just go to hell.

Sorry for late response.  Actually my portfolio is very much structured in a way to benefit from high inflation.  This is because even though myself and my DW are in very high paying jobs, we both are way overpaid relative to our competence.  Phase one defense against that risk is that our management does not discover this and they have not yet in either case.  Once they do figure this out, they will not fire us as we are both valuable in our respective megacorps.  What they will do is keep our pay increase to a nominal 1%-2% a year.  Here is where inflation comes in.  If inflation is 0%-1% we are in good shape as our goal is merely persevering our current compensation in real terms.  If inflation is 4%-5% this will represent a decrease in our income.  In fact that is what took place in the 1970s inflation.  It was a great opportunity for enterprises to decrease compensation in real terms but keeping some small nominal increase every year.  So given this risk our portfolio is structured to hedge against high inflation of the 4%+ variety.  In fact overall, our portfolio has under-performed in 2014 and 2015 mostly because of that reason since inflation has come in lower than expected in that period.  I am not complaining, I wanted a certain point in the investment trade-off curve and I got what I bargained for.

That out of the way I am for low or zero inflation mostly alone the lines of the Friedman rule

http://en.wikipedia.org/wiki/Friedman_rule

[jaichind]

Looks like inflation expectations in 2015 has now fallen to somewhere around 0.3%.  YOY it seems it will be 0% for the first 3 quarters followed by around 1.2% in Q4.  If Yellen has a target of 2% inflation, current inflation swaps indicate that it will take 12 years to get to an overall average of 2% during that period.  Same swap curve also indicate long term inflation to be around 2.2%-2.3% which is a good deal lower than the 3% rule of thumb for retirement planning professionals typically use. 

[jaichind]

Feb CPI YOY came in at 0% which is a bit more than the expected -0.1%.  Still we are looking at around 0.3% or 0.4% for all of 2015.  What I find interesting is that Jan 2015 Chain CPI came in at -0.6% YOY and Feb 2015 Chain CPI came in at -0.5% YOY.  Usually Chain CPI comes in at around 0.2% less than CPI.  That gap has opened to more like 0.5%.  if this trends continues it seems to indicate a wide level of churn of terms of prices shifts between different products.  This also means that what people experience as "their" CPI will deviate more from each other.  I noticed that over the years that CPI tends to overstate my spending cost price increase.  My budget cost increase tend to match that of Chain CPI than CPI. 

[jaichind]

April CPI YOY came in at -0.2% which is the expected value.  For the entire year I think we are looking at around 0.35%  April Chain CPI -0.6% so the trend of a larger gap between Chained CPI and CPI continues.  Historically the gap tends to be around 0.2% but now it seems more like 0.4% which again argues for a larger variation in price increases.  As I mentioned before I totally believe the Chained CPI number as my own household personal expenditure CPI as I measure it is also around the Chained CPI number if not even more negative (like -1.0%).  

So the result of the economists and derivative traders battle/gap on 2015 on CPI expectations at the end of last year seems to end in a tie leaning the derivative traders favor as economists expected 1% and derivatives traders expected -0.1%.

[jaichind]

Looking at inflation swaps, if Yellen's goal is 2% inflation, one has to go out to 10 years before the inflation over the entire period reaches 2%.   Over the next 5 years inflation will average 1.85% as per inflation swaps.

[jaichind]

The May CPI YOY is 0.0% which is again lower than expected. CPI Chain YOY is -0.3%.  The gap between CPI and CPI Chain is narrowing from earlier in the year.  We are still headed toward 0.3% inflation for the entire year of 2015.  If the USA GDP growth in 2015 will be around 2%, then USA 2015 nominal GDP growth will be lower (by a large gap) than every year since 2009 when nominal GDP growth was deeply negative.

[jaichind]

Looks like we will end up in 2015 inflation being around 0.2% or perhaps even lower so the inflation swap traders were closer to the mark the economists.  We will be more sure in Dec this year.  For 2016 the swap traders say it will be around 0.6% while the economists have it at around 2.0%.

[jaichind]

Looks like we will end up in 2015 inflation being around 0.2% or perhaps even lower so the inflation swap traders were closer to the mark the economists.  We will be more sure in Dec this year.  For 2016 the swap traders say it will be around 0.6% while the economists have it at around 2.0%.

Who are these The Economists? They sound bad at their jobs.

They are economists at various financial institutions (investment banks, economic/financial research firms, various funds etc etc) which happen to be the same institutions where the swap traders usually work too.  So often within the same institution the swap traders come up with totally different inflation rates forecasts relative to economists.  Since I have some involvement in this sector I am able to speak to some of these economists and swap traders from time to time.  Both insist they are right of course.  Swap traders say that economists tend to have a herd mentality and are too conservative to shift their forecasts to fit ground realities until it is far too late.  Economists claim that swap traders are often trying to hedge their positions so the inflation swap market is more dominated by that factor than what the real inflation rates is going to be.  Of course so far the swap traders ended up being right.  Let be clear the economist tend to be good at forecasting the monthly CPI YOY number coming out days afterwards.   In 2015 they mostly failed to predict the yearly CPI a year in advance. 

The Sept CPI YOY number will come out in a couple of days.  Economist consensus which I said is mostly accurate seems to be -0.1%.   If so then we are even more likely to have the entire 2015 CPI being around 0.2%

[jaichind]

Dec Inflation came in at 0.7% which that in 2015 CPI is just 0.12%. Pretty much total victory for the swap traders of late 2014 versus the economists.  For 2016 the Economist project around 1.5%-1.6% while the swap traders expect around 0.8%.