Inflation readings are currently low but this does not mean that inflation is not present in the system.  Remember that the technical definition of inflation is when money flows into the system at a higher velocity than the rate at which it is flowing out of the system.  This has certainly occurred in the U.S. economy since 2008.

The Consumer Price Index (CPI) rose 0.5% in March, which was generally in line with expectations and was similar to February’s rise.  Key components driving the increase were food and energy prices (Ex. energy is up 15% vs. year prior). The “Core CPI”, on the other hand, which largely factors out the effects of food and energy, was up by only 0.1% in March.

It is the Core CPI statistic that is closely watched by the Fed for inflation signals since it is less subject to erratic monthly swings. What continue to keep Core CPI at bay, in our opinion at Hennion & Walsh, are high unemployment and a lack of aggregate demand.  However, even Core CPI inflation is trending upwards.  To this point, John Mauldin commented in a April 16, 2011 “News of the Frontline” newsletter that while, “Core inflation was tame, overall inflation is still running at over a 5% annualized rate (and above 6% over the last three months!).”

We also believe it is important to look at the year over year inflation trend and attached the chart below to show the overall trend since 2008.  One will observe from this chart that overall CPI is up 2.7% vs. year prior and that this rate has been rising since September 2010 and positive since November of 2009.

Source: U.S. Department of Labor – Department of Labor Statistics

We expect inflationary pressures to continue and we would not be surprised to see the 5% annualized rate hold, and potentially even accelerate further.