Consensus expectations were off regarding the November estimate for U.S. CPI inflation released yesterday. The 0.3% fall for headline inflation was a larger drop than estimated by 82 of the 84 economists who ventured forth with an opinion in Bloomberg’s survey. No-one offered up a forecast of a greater fall than 0.3%. We suspect that consensus expectations for inflation in early 2015 are similarly off the mark. Back-of-the-envelope calculations suggest that for a relatively wide range of oil price scenarios, over the next several months, the U.S. headline inflation rate will plunge.
A plunge for headline inflation is already baked in the cake for December. The E.I.A. surveys of gasoline prices at the pump December-to-date are down around 70 cents, year-on-year. That is almost double the 32 cent year-on-year fall registered in November. Based on the energy component alone, the CPI headline looks set up to fall around 0.7% for the month, which would take year-on-year headline inflation down to 0.3%. And it appears there is more to come. If we embed today’s energy futures prices into consumer product prices, the drop in first quarter 2015 CPI inflation could be breathtaking. For example, near-contract futures prices for gasoline are trading down $1.15, year-on-year. (more…)