Global Macro: U.S. Inflation Remains Suppressed

TheStreet.com

NEW YORK (TheStreet) -- U.S. inflation data underperformed expectations on Thursday, providing reassurance that the Federal Reserve's stimulus efforts were far from over.

The chart below shows a month over month change in CPI inflation readings, which look to be trending slightly lower. The blue line represents the actual month over month movements and the red line shows a smoothed four-month moving average. The moving average signals that although stimulus efforts have been greatly increased in 2013, U.S. inflation continues to trend lower.

Weak inflation and high, albeit improving, unemployment figures show that the recovery remains gradual. Monetary policy has remained simulative, but fiscal policy has proven to be counter-growth. January saw the implementation of tax hikes and March brought with it budget cuts, better known as the federal sequestration.

As a testament to the level of pain fiscal policy is bringing to the economy, Wal-Mart reported that same-store sales for the first quarter were weaker as the consumer was hurt by such fiscal policy restraints. Similarly, factory activity has been hindered by government austerity, as seen in data releases that missed expectations for the Empire State regional manufacturing activity and industrial production on Wednesday.

Monetary policy is aiming to counteract fiscal austerity. Until both act in an expansionary manner, economic weakness looks to persist.

The chart below is of DB USD Index Bullish over an equal-weight DB Commodity Index Tracking Fund. This pair aims to show how financial markets are reacting to tepid inflation outlooks. Inflation has proven weak in both Europe and the United States over the past quarter, which has damped demand for commodities. Weakness in commodities and the absence of price pressure in the U.S. has led to a stronger dollar.

Although economic data is not impressive in the U.S., monetary easing in other countries has kept the dollar at elevated levels. As long as inflation remains weak and other countries continue to devalue their currencies, commodities should underperform the dollar.

The last pair is of Barclays TIPS Bond Fund over Barclays 7-10 Year Treasury Bond Fund. This is another inflation indicator, within financial markets, signaling that expectations remain suppressed. CPI readings have failed to reach the 2% year over year Federal Reserve mandate, which has brought the pair below, down to yearly support zones.

Investors do not see the need for inflation protected securities because they do not fear inflation. Although monetary policy remains accommodative, and in the future rates have nowhere to go but up, investors do not see rates moving in the near term.

Contrary to Japan, where there is an increased fear of rising rates, the U.S. government has not done enough to coordinate both monetary and fiscal policy that leads to GDP expansion. However, financial markets are signaling that they will continue to bid equities higher, even in the face of gradual economic improvement.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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