Financial Pacific - Evidence of broad based core CPI inflation acceleration (third party)
Upcoming SlideShare
Loading in...5
×
 

Financial Pacific - Evidence of broad based core CPI inflation acceleration (third party)

on

  • 287 views

Visit our website for more information: http://www.investingpacific.com/...

Visit our website for more information: http://www.investingpacific.com/
Financial Pacific: “The Right Wave to Invest”

In today’s global economy it is important to be fully aware of the intricacies of international investments and the opportunities that these have to offer. Financial Pacific offers proven overseas investment opportunities.
If you are interested in a reliable investment institution look no further because Financial Pacific provides: Wealth Management, Online Trading, Institutional Services and Corporate Finance. With cutting edge technology we are capable to support highly specialized derivatives instruments such as: CFDs, ETFs, CFDs on Commodities, ETCs, Futures and Options. In addition investors have access to a wide range of investment opportunities through: Structured Notes, Fixed Income, Reverse Convertibles, Preferred Stocks, and Institutional Hedge Funds.
Fully regulated by Comisión Nacional de Valores de Panama since 2003; allow us to provide you with the necessary tools to take advantage of the global markets.

Statistics

Views

Total Views
287
Views on SlideShare
287
Embed Views
0

Actions

Likes
0
Downloads
5
Comments
0

0 Embeds 0

No embeds

Accessibility

Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

Financial Pacific - Evidence of broad based core CPI inflation acceleration (third party) Financial Pacific - Evidence of broad based core CPI inflation acceleration (third party) Document Transcript

  • Wealth Management Research 21 June 2011US economics Thomas Berner, CFA, economist, UBS FSInflation forecast change thomas.berner@ubs.com, +1 212 713 4108 • We have raised our US core inflation forecasts on the back of a stronger-than-expected inflation acceleration since early in the year. • On a 4Q to 4Q basis, we now expect core CPI inflation of 1.9% in 2011 and 2.1% in 2012, both close to the FOMCs longer-run inflation forecast. • Rent and owners equivalent rent (OER) have been the main drivers of the acceleration in core CPI inflation since early in the year. Vehicle and to a lesser extent apparel price inflation explain most of the remaining pick-up in inflation not accounted for by rent and OER. Fig. 1: Rent inflation on the rise Headline CPI, core CPI, rent and owners equivalentChange in US inflation forecasts rent, year-over-year in %We have raised our 2011 and 2012 inflation forecasts for the coreConsumer Price Index (CPI) and the core Personal Consumption(PCE) deflator. While we have been expecting a trend increase ininflation since the beginning of the year, the acceleration in inflationhas been stronger than we had expected. On a calendar averagebasis, we have increased our core CPI inflation forecast from 1.3%to 1.5% in 2011 and from 1.5% to 2% in 2012. On a 4Q to 4Qbasis, we have raised our core CPI inflation forecast from 1.4% to1.9% in 2011 and from 1.8% to 2.1% in 2012. Revisions similarin magnitude have raised our core PCE deflator forecast to 1.4%in 2011 and 2.1% in 2012 on a calendar-average basis and to1.9% in 2011 and 2.2% in 2012 on a 4Q to 4Q basis. HeadlineCPI inflation was raised purely due to the increase in our core CPI Source: Bloomberg, as of 20 June 2011inflation forecasts. We now expect 2.9% in 2011 and 1.8% in 2012on a calendar-average basis and to 2.8% in 2011 and 2.2% in 2012on a 4Q to 4Q basis.Rent inflation acceleration has been the main driverSince the beginning of the year, rent inflation has been accelerating(see Fig. 1). While rent inflation is still subdued, its huge share incore CPI has made it the main driver of the marked pick-up in coreCPI inflation. Rent (actual rent asked in the market for rental units)makes up about 8% of core CPI, whereas owners equivalent rent(OER) (imputed rent from homeowners if they put their residentialunit on the rental market) makes up about 33% of core CPI. Thecombined weight is 41%. Combined, rent and OER inflation haveThis report has been prepared by UBS Financial Services Inc. (UBS FS). Please see important disclaimers anddisclosures that begin on page 3.
  • US economicsadded about 0.5 percentage points to the acceleration in core CPI of1.7 percentage points from 0.6% year-over-year (y/y) in December2010 to 2.4% at an annual rate in May. That still leaves about two-thirds of the rise unexplained by the heavyweights rent and OER.This notwithstanding, the prospect of further acceleration in rentand OER inflation on the back of ongoing growth, improving labormarket conditions and tightening rental markets makes these com-ponents extremely important for the outlook given their combinedlarge weight in core CPI.Some evidence of broad-based core CPI inflation accelerationOf the remaining 1.2 percentage point core CPI acceleration at anannual rate since the beginning of the year, most of it can be ex-plained with a pick-up in inflation for apparel and vehicles. Appar-el prices have swung from falling 1% y/y in December 2010 to ris-ing 2.3% annualized through May since the beginning of the year.Weight-adjusted that added about 0.1 percentage points to thecore CPI inflation acceleration. Vehicle price inflation has accelerat-ed more dramatically: +0.8% y/y in December 2010 versus +7.2%annualized in May 2011 since early 2011. Its higher weight rendersthis goods category a core CPI inflation acceleration contributionof 0.4 percentage points. Both items represent discretionary goodscategories and thus could be signaling that the spending power ofhouseholds is rising. As of late, the Japan-related supply disruptionshave added to auto price pressures. In that sense, and if consumerspending growth re-accelerates after the recent soft patch as weexpect, it reflects a stronger economy and is consistent with risinginflation. Note that this is not a bad thing per se and actually a wel-come development given the fear of deflation still prevailing latelast year.The damnation of stagflationShould we be wrong, and the recent acceleration in core CPI infla-tion is not accompanied with a rebound in real GDP growth, thenthis would put the Fed in a very uncomfortable position. Our newforecasts put core CPI and PCE at 2.1% and 2.2% on a 4Q to 4Q ba-sis in 2012, respectively. The long-term core PCE inflation forecast ofthe FOMC is 1.7% to 2%. Historically, the highest impact on infla-tion from a change in monetary policy materializes after 12 months.After that the impact is still visible but it fades slowly. Therefore,the FOMC will have to act earlier than towards the end of 2012to avoid core PCE inflation to overshoot above its implicit inflationtarget of a maximum of 2%. Should real activity growth not pickup by year-end 2011, the FOMC will have a very tough choice be-tween avoiding an inflation overshoot and choking a fragile recov-ery. Consistent with our view that real GDP growth will reacceleratefrom 1.8% q/q annualized in 1Q11 to 2.5% in 2Q11 and 3.5% in3Q11 and our raised core inflation forecasts we continue to expectthe first rate hike in 1Q12 in the January FOMC meeting. Beforethat we expect the FOMC to announce halting the reinvestment ofmortgage back securities (MBS) in late 2011. Despite the prospectof higher inflation, we think that the risk of the Fed waiting longerwith tightening monetary policy is higher than the risk of the Fedraising rates earlier. Wealth Management Research 21 June 2011 2
  • US economicsAppendixGlobal DisclaimerWealth Management Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisionsof UBS AG (UBS) or an affiliate thereof. In certain countries UBS AG is referred to as UBS SA. This publication is for your information onlyand is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis containedherein is based on numerous assumptions. Different assumptions could result in materially different results. Certain services and productsare subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors.All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but norepresentation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS and itsaffiliates). All information and opinions as well as any prices indicated are current as of the date of this report, and are subject to changewithout notice. Opinions expressed herein may differ or be contrary to those expressed by other business areas or divisions of UBS as aresult of using different assumptions and/or criteria. At any time UBS AG and other companies in the UBS group (or employees thereof)may have a long or short position, or deal as principal or agent, in relevant securities or provide advisory or other services to the issuerof relevant securities or to a company connected with an issuer. Some investments may not be readily realizable since the market in thesecurities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify.UBS relies on information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units,divisions or affiliates of UBS. Futures and options trading is considered risky. Past performance of an investment is no guarantee for itsfuture performance. Some investments may be subject to sudden and large falls in value and on realization you may receive back lessthan you invested or may be required to pay more. Changes in FX rates may have an adverse effect on the price, value or income ofan investment. We are of necessity unable to take into account the particular investment objectives, financial situation and needs of ourindividual clients and we would recommend that you take financial and/or tax advice as to the implications (including tax) of investingin any of the products mentioned herein. This document may not be reproduced or copies circulated without prior authority of UBS or asubsidiary of UBS. UBS expressly prohibits the distribution and transfer of this document to third parties for any reason. UBS will not beliable for any claims or lawsuits from any third parties arising from the use or distribution of this document. This report is for distributiononly under such circumstances as may be permitted by applicable law.Australia: 1) Clients of UBS Wealth Management Australia Ltd: This notice is distributed to clients of UBS Wealth ManagementAustralia Ltd ABN 50 005 311 937 (Holder of Australian Financial Services Licence No. 231127), Chifley Tower, 2 Chifley Square, Sydney,New South Wales, NSW 2000, by UBS Wealth Management Australia Ltd.: This Document contains general information and/or generaladvice only and does not constitute personal financial product advice. As such the content of the Document was prepared without takinginto account the objectives, financial situation or needs of any specific recipient. Prior to making any investment decision, a recipientshould obtain personal financial product advice from an independent adviser and consider any relevant offer documents (including anyproduct disclosure statement) where the acquisition of financial products is being considered. 2) Clients of UBS AG: This notice is issuedby UBS AG ABN 47 088 129 613 (Holder of Australian Financial Services Licence No 231087): This Document is issued and distributedby UBS AG. This is the case despite anything to the contrary in the Document. The Document is intended for use only by “WholesaleClients” as defined in section 761G (“Wholesale Clients”) of the Corporations Act 2001 (Cth) (“Corporations Act”). In no circumstancesmay the Document be made available by UBS AG to a “Retail Client” as defined in section 761G of the Corporations Act. UBS AG’sresearch services are only available to Wholesale Clients. The Document is general information only and does not take into account anyperson’s investment objectives, financial and taxation situation or particular needs. Austria: This publication is not intended to constitutea public offer or a comparable solicitation under Austrian law and will only be used under circumstances which will not be equivalent toa public offering of securities in Austria. The document may only be used by the direct recipient of this information and may under nocircumstances be passed on to any other investor. Bahamas: This publication is distributed to private clients of UBS (Bahamas) Ltd and isnot intended for distribution to persons designated as a Bahamian citizen or resident under the Bahamas Exchange Control Regulations.Canada: In Canada, this publication is distributed to clients of UBS Wealth Management Canada by UBS Investment Management CanadaInc.. Dubai: Research is issued by UBS AG Dubai Branch within the DIFC, is intended for professional clients only and is not for onwarddistribution within the United Arab Emirates. France: This publication is distributed by UBS (France) S.A., French "société anonyme" withshare capital of € 125.726.944, 69, boulevard Haussmann F-75008 Paris, R.C.S. Paris B 421 255 670, to its clients and prospects. UBS(France) S.A. is a provider of investment services duly authorized according to the terms of the "Code Monétaire et Financier", regulatedby French banking and financial authorities as the "Banque de France" and the "Autorité des Marchés Financiers". Germany: The issuerunder German Law is UBS Deutschland AG, Bockenheimer Landstrasse 2-4, 60306 Frankfurt am Main. UBS Deutschland AG is authorizedand regulated by the "Bundesanstalt für Finanzdienstleistungsaufsicht". Hong Kong: This publication is distributed to clients of UBS AGHong Kong Branch by UBS AG Hong Kong Branch, a licensed bank under the Hong Kong Banking Ordinance and a registered institutionunder the Securities and Futures Ordinance. Indonesia: This research or publication is not intended and not prepared for purposes ofpublic offering of securities under the Indonesian Capital Market Law and its implementing regulations. Securities mentioned in thismaterial have not been, and will not be, registered under the Indonesian Capital Market Law and Regulations. Italy: This publication isdistributed to the clients of UBS (Italia) S.p.A., via del vecchio politecnico 3, Milano, an Italian bank duly authorized by Bank of Italy to theprovision of financial services and supervised by "Consob" and Bank of Italy. Jersey: UBS AG, Jersey Branch, is regulated and authorizedby the Jersey Financial Services Commission for the conduct of banking, funds and investment business. Luxembourg: This publication isnot intended to constitute a public offer under Luxembourg law, but might be made available for information purposes to clients of UBS(Luxembourg) S.A., a regulated bank under the supervision of the "Commission de Surveillance du Secteur Financier" (CSSF), to whichthis publication has not been submitted for approval. Singapore: Please contact UBS AG Singapore branch, an exempt financial adviserunder the Singapore Financial Advisers Act (Cap. 110) and a wholesale bank licensed under the Singapore Banking Act (Cap. 19) regulatedby the Monetary Authority of Singapore, in respect of any matters arising from, or in connection with, the analysis or report. Spain: Thispublication is distributed to clients of UBS Bank, S.A. by UBS Bank, S.A., a bank registered with the Bank of Spain. UAE: This research reportis not intended to constitute an offer, sale or delivery of shares or other securities under the laws of the United Arab Emirates (UAE). Thecontents of this report have not been and will not be approved by any authority in the United Arab Emirates including the UAE Central Bankor Dubai Financial Authorities, the Emirates Securities and Commodities Authority, the Dubai Financial Market, the Abu Dhabi Securitiesmarket or any other UAE exchange. UK: Approved by UBS AG, authorized and regulated in the UK by the Financial Services Authority.A member of the London Stock Exchange. This publication is distributed to private clients of UBS London in the UK. Where products orservices are provided from outside the UK, they will not be covered by the UK regulatory regime or the Financial Services CompensationScheme. USA: Distributed to US persons by UBS Financial Services Inc., a subsidiary of UBS AG. UBS Securities LLC is a subsidiary of UBSAG and an affiliate of UBS Financial Services Inc. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by anon-US affiliate when it distributes reports to US persons. All transactions by a US person in the securities mentioned in this report shouldbe effected through a US-registered broker dealer affiliated with UBS, and not through a non-US affiliate.Version as per January 2010.© UBS 2011.The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. Wealth Management Research 21 June 2011 3