Inflation Data Doesn't Make a Case to Taper

by Jay Pestrichelli on December 17th, 2013

The market reacted this morning with a resounding “Meh” when the monthly CPI data was released. In case you blinked and missed the minor media coverage, the consumer price index advanced only 1.2% in November from a year earlier. The core rate came in at 1.7% due to the rise in housing prices. The monthly change for November over October was actually unchanged as lower gas prices offset the rise in housing.

Here’s a chart from MarketWatch.com to keep the last 2 years in perspective of where this falls:
Why does this matter? It matters as inflation is only 1 of 2 metrics the Fed has claimed to be the guideline for when the easing of QE (aka tapering) should begin as well as moving interest rates.  Why you may ask? The answer is this the guage they are using to determine how much damage QE is doing. If Inflation gets out of control, it would offset the benefits of lower rates. The Fed has a target f 2.0% and has said on more than one occasion that a CPI of 2.5% annually would be the high end of the range they are targeting.  

Here’s a great chart from the WSJ that puts the trend of inflation into perspective:
A month ago, we heard more than one Fed president express that as long as QE wasn’t doing any harm, there would be no rush to slow it. If CPI is the yardstick to which they are making that measurement, it stands to reason that there appears like there won’t be a rush to taper.
 
Let’s remember why the QE program is in place to begin with. It is to help lower interest rates as a means of stimulating growth and recovery.  The graph below shows the 10-year note yield against the CPI monthly rate of change.  The orange line is the yield on the 10-year note and the blue line is the US CPI 1-month percent change.
If I were the Fed, it would seem pretty clear that the QE work is not done yet, but damage to inflation has yet to occur. Actually, some could interpret this as the FED is behind on its inflation target. Interest rates rise while inflation stays relatively stable and flat. That gap is not the result they are shooting for. 
 
So as a stock market investor worried about a taper in December or January, this CPI data makes me feel a lot better that this bull run will continue…at least for a few more months.


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