• 13 hours Boris Johnson Proposes Billion Dollar Bridge To Northern Ireland
  • 2 days Goldman Slashes Oil Price Forecast By $10
  • 3 days Tesla Raises $2 Billion In Share Selloff
  • 4 days What The T-Mobile Takeover Of Sprint Really Means For Markets
  • 4 days The U.S. Has Charged Huawei With Racketeering And Conspiracy
  • 4 days How Hydrogen Could Become The Fuel Of The Future
  • 5 days Millennials Can’t Retire, But They’ll Still Have To Help Their Parents
  • 5 days This Gold Miner Just Increased Its Dividends By 40%
  • 5 days Airbnb IPO Under Threat As China's Economy Drags
  • 6 days The Infamous Equifax Hack Just Became A National Security Issue
  • 6 days BHP Takes The Crown As World’s Top Copper Miner
  • 6 days Tesla Reopens Chinese Factory After Coronavirus Scare
  • 7 days Armed Troops Storm El Salvador’s Parliament
  • 7 days Is A New Housing Bubble Forming?
  • 7 days The Biggest Challenge Facing West Africa's Single Currency Plan
  • 7 days Iran's Space Program Hits Another Snag
  • 8 days The Politics Of Love In The Digital World
  • 8 days Coronavirus: Much Ado About Nothing?
  • 9 days Are Silver Stocks Poised For A Breakout?
  • 9 days Is This The Tesla Of Motorcycles?
What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

Prieur du Plessis

Prieur du Plessis

With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in…

Contact Author

  1. Home
  2. Markets
  3. Other

Inflation: U.S. Consumer Price Index to Drop in June

The US consumer price index rose significantly to 3.44% in May from a year ago and 0.2% from its April level. The increase was bang on target with my estimate. However, I believe that May's figure on a year-ago basis approached a plateau in the current cycle.

My analysis indicates that changes in the CPI inflation rate on a year-ago basis and especially CPI ex shelter are explained by changes in the oil price compared to a year ago. It is particularly evident since the end of 2006 where more than 94% of the direction of the CPI ex shelter is explained by the year-on-year absolute change in the price of crude oil.

CPI inflation rate explained
Sources: I-Net Bridge; Plexus Asset Management.

Shelter's weight of approximately 32.3% in the CPI and the one-month lag between the change in the oil price and CPI ex shelter inflation enables me to make a reasonably accurate forecast. The change in the oil price is a known factor while the only unknown factor is the CPI shelter CPI. But with a more stable trend the CPI shelter CPI inflation rate that can be expected is fairly reasonably assumed.

Change in Oil Price
Sources: Bureau of Labor; Plexus Asset Management.

The year-on-year change in Light Louisiana Sweet crude in May was $41.53 per barrel. The historical relationship between the change in the Light Louisiana Sweet crude and the CPI ex shelter inflation rate points to a year-on-year CPI ex shelter inflation rate of 4.77% in June given the said lag. That makes up 67.7% of the overall CPI inflation rate (overall CPI minus the 32.3% weight of the shelter CPI) and will therefore be 3.23%. If I assume a year-on-year change of 1% in the shelter CPI, May's total CPI will add up as follows:

(67.7% of 4.77%) plus (32.3% of 1%) = 3.23% plus 0.32% = 3.55%.

The 3.55% inflation rate means that the consumer price index will drop by 0.1% in June. The first decline since June last year!

But where is CPI inflation heading?

Without taking a stab at where the oil price is heading, I looked at three scenarios where the price per barrel of Louisiana Sweet crude was kept constant at $100, $115 (current) and $130 respectively for the next 12 months. The monthly oil price was then compared to the price a year ago and depicted against the CPI ex shelter inflation rate lagged by one month.

Oil vs CPI ex shelter inflation rate
Sources: Bureau of Labor; I-Net; Plexus Asset Management.

By applying the historical regression equation the trend of future CPI ex shelter year-on-year inflation is as follows:

applying the historical regression equation the trend of future CPI ex shelter year-on-year inflation
Sources: Bureau of Labor; I-Net; Plexus Asset Management.

Assuming that the year-on-year inflation rate for shelter remains steady at 1.0%, the outlook for the overall CPI inflation rate is as follows:

outlook for the overall CPI inflation rate
Sources: Bureau of Labor; I-Net; Plexus Asset Management.

 

  Year-on-year CPI inflation Rate %
@ constant
$115/barrel
@ constant
$130/barrel
@ constant
$100/barrel
May-11 3.44 (actual)
Jun-11 3.55 3.55 3.55
Jul-11 3.32 4.03 2.61
Aug-11 3.15 3.86 2.44
Sep-11 3.44 4.15 2.73
Oct-11 3.01 3.72 2.30
Nov-11 3.02 3.73 2.31
Dec-11 2.85 3.56 2.14
Jan-12 2.51 3.22 1.80
Feb-12 2.11 2.82 1.40
Mar-12 1.55 2.26 0.84
Apr-12 1.35 2.06 0.64

Sources: Bureau of Labor; I-Net; Plexus Asset Management.

It is evident in the above that the US CPI inflation rate is likely to peak at 3.55% in June if the oil price maintains its current level or weaken. Even if the oil price spikes to $130 per barrel and maintains that level, the inflation rate will still top out in July this year. There may be a short further spike in September owing to a brief drop in the oil price in August last year.

 

Back to homepage

Leave a comment

Leave a comment