In April the CPI registered a 3.2% rise over the past 12 months, a 5.1% annualized rise over the past six months and a 6.2% annualized rise over the past three months. The bond market and the Fed appear to be ignoring that, in the belief that it is mainly due to energy prices, and those have already cooled in recent weeks, so perhaps this is only a transitory rise in inflation.
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But as this chart shows, the core CPI (ex food & energy) is up 1.3% over the past 12 months. Moreover, it is up at an annualized rate of 1.8% in the past six months and a 2.1% annualized rate in the past three months.
It's not so easy to dismiss the recent rise in inflation as transitory. If we just look at the CPI ex-energy, it is up 1.6% in the past 12 months and has risen at an annualized rate of 2.3% in the past six months and 2.9% in the past three months. Inflation is heating up, no matter how you slice and dice the numbers, and the pickup appears to be broad-based.
This chart also suggests that the bond market is on shaky ground, since inflation is the most important determinant of yields. The core CPI will almost certainly approach 2% on a year over year basis in coming months, and could well exceed that level before the year is out.
The last time the core CPI was 2%, bond yields were substantially higher than they are today. The bond market is ignoring the rise in inflation for now, in the belief that economic weakness makes it only a temporary phenomenon, but that belief is going to be tested in coming months. From my perspective, I see no reason for core inflation to decline, so I think there is a good chance that Treasury yields are going to rise.
Full disclosure: I am long TBT at the time of this writing.