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By New_Deal_democrat December 6, 2016 1:27 pm
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2017: a late-cycle year of inflation?

It appears that 2017 is setting up as a typical late cycle year of inflation.



That's certainly what the long bond seems to expect:







But there are other reasons to think that inflation may be about to hit a recent high.  

 

To begin with, over the last 8 months, prices have increased 1.7%, or roughly a 2.5% annualized rate:







To a large extent, this is about oil and gas prices normalizing as shown on the below graph of gas's YoY% change:







Additionally, CPI for shelter has been increasing at over 3% a year:







Since house prices tend to follow sales, and house sales have made new highs in the last few months, that suggests that house price inflation might also accelerate:







As I wrote several weeks ago, we may be coming in for a good spate of employment numbers, including a decline in the unemployment rate, and this will add to some wage pressure:







So there is good reason to believe that the inflation rate is going to increase significantly over 2% next year.  



If it does so, this will be a classic late cycle increase in inflation, as the below graph of YoY wage growth (blue) and inflation (red) shows:







Typically over the last 60 years, the Fed has chased inflation at this stage, and causes a yield curve inversion, as "real" wages stall and decline, heralding a recession.  We'll see.

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