Inflation

Expect economic recovery to pick up a little steam in early 2007, before slowing down in the second half. A 2008 recession is a possibility. 

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Looking ahead, CPI twelve month rate of inflation is likely to be in the +2% area for the first half of 2007.

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Bond yields continue to fall as economic reports have tended to be on the weak side. Massive global liquidity and the search for yield have also helped to push yields lower. We have been way off the mark with our predictions for higher rates.

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Inflation expectations seem to be on the rise.

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Our call for a bond market correction did not pan out in October, but yields did back up in early November as weak productivity and a surprisingly low unemployment rate were released.

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CPI on a twelve month basis expected to decelerate further over the next month or two. Final two months of the year, however, could be another story, with CPI twelve month inflation reaccelerating.

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CPI on a twelve month basis is expected to decelerate further over the next two months. The final 3 months of the year, however, could be another story.

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Bond market seems to be anticipating three key developments: Fed’s stance could switch from tightening to easing, the economy is slowing significantly, and inflation is licked.

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There remains considerable macro support for industrial commodities. 

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CPI on a twelve month basis still expected to decelerate over the next three months. The final 3 months of the year, however could be another story, with CPI twelve month inflation accelerating.        

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Continue to project higher interest rates over the next six months, particularly longer maturities. Short rates could begin to decline by early-mid 2007, after Fed finishes tightening and economy slows.

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Half time update. Leuthold looks back at December 2005 predictions. Additional comments on Inflation, Corporate Earnings, The Dollar, Oil Prices, Gold, and Federal Budget Deficit.

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CPI still expected to decelerate over the next four months as current readings get compared to above average readings a year ago.  The final three months of the year, however, could be another story.

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Raised our 2006 CPI estimate (mid-May) to +4.5% from initial projection of +4.0% or less.

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The Major inflation concerns are rising wages, low unemployment, a continued strong economy, and additional pass through of higher energy prices.

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PPI rate of change exceeds the CPI at present, and has been higher since late 2003. Could be a bad omen for corporate profits.

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Inflation, particularly wage inflation, continues to accelerate. Wage inflation is now at its highest level since 2001.

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The major inflation concern is to what degree significantly higher energy costs will be passed through, even if energy prices stabilize or decline.

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It may be difficult for the economy to prolong its expansion, with the auto and housing sectors weakening and consumer spending a big question mark. 

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Expecting economy to slow in 2006, with possibility of recession developing late in the year. Energy prices remain a wild card.

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