There is no doubt that we are going to see U.S. headline inflation increase in coming months as the effects of higher wholesale food and energy costs kick in, also some apparel price increases, as the surge in cotton percolates. But this by no means suggests a stagflation cycle is ahead — in the past three years we have seen headline inflation as high as +6% and as low as -2%.
The bottom line is that most other price components are either stable or falling — the core (excluding food and energy) personal consumption expenditure (PCE) price index slowed to a mere 0.4% annual rate in Q4 — a record low (data back to 1959) — from +0.5% in Q3, +1.0% in Q2, +1.2% in Q1 and +2.1% in Q4 of 2009. That is three quarters in a row of deceleration in core inflation, which is why U.S. 10-year T-note yields refuse to break out of the pervasive 2-4% range, even with a whippy speculative rally in risk assets.
The YoY core PCE price trend, at 0.8%, is also below the 1.7% trend at the turn of 2010. Tack on that +0.4% pace in employment costs — the index came out on Friday as well for Q4 — and there is still no evidence of any inflation beyond the boom in the commodity markets.
---ibid. Note: PEC = Personal Consumption Expenditure.
Update: Plus, if you are into inflation stuff, see this Krugman piece.