A friend asked me some inflation questions recently: questions of the sort — what’s the probability of CPI being x given y.
I told him — I haven’t a clue exactly what you’re asking, but if you write it down formally I can test any hypothesis.
To that end, I was playing with the data tonight — looking at CPI outcomes, and also if there was anything sensible that we could say about CPI given other data.
The first thing I did was to have a look at the QoQ changes in core CPI (I use the average of the weighted median and trimmed mean) — to see if Q1’11 was an outlier. It sure was a tail event (rising 0.475ppts), but it doesn’t look like an outlier…
This surprised me, as a few folks I respect think that it was an outlier. So I thought – let’s split the sample … I split it into three parts:
1/ Dcpi.up = where the average of the unemployment rate in the most recent six months is greater than 25bps higher than it was in the prior six months;
2/ Dcpi.steady = where the average of the unemployment rate in the most recent six months is within a 50bps range (+/- 25bps) of the average in the prior six months; and
3/ Dcpi.down = where the average of the unemployment rate in the most recent six months is greater than 25bps lower than it was in the prior six months …
What I find more interesting about these results, however, is the asymmetry in the distributions. You really can only count on declines in the pace of inflation if the unemployment rate is rising.
Other than that, inflation tends to accelerate. So unless your forecast is that the unemployment rate will rise from here, it seems fairly sure that the pace of inflation will accelerate and that at some point the RBA will tighten.
With recently softer data, perhaps that point won’t be reached in August – however I would be surprised if inflation slowed enough to take further tightening off the table.
That would require an up-trend in the unemployment rate, and I find that unlikely.
My money is now on November – as I think that the damage already done by Greece (it’s mucked up intermediation by disrupting corporate issuance markets) means that Q3 global won’t pick up much from the turgid H1’11.
But don’t fret, I’ve booked ‘the bounce’ for Q4’11…