Pimco sees real possibility of much higher inflation as the commodities runup gets passed onto consumers

This is what we have been saying here for a long time.  Price increases have been modest for some time, however, they could get much worse.  Via Pimco:
  • Masked behind these seemingly benign near-term increases in inflation are a number of longer-term factors that we believe could actually result in undesirably high rates of inflation in the not-too-distant future.
  • Higher rates of increases in food, energy and other commodity prices are leading to a divergence between the core rate of inflation that the Fed focuses on and the headline rate that includes food and energy prices and actually affects consumers.
The likelihood of large scale price increases is what disturbs me.  The biggest problem with the CPI is their weighting of the components.  Shelter is up to 40% of the index.  Its freefall, means that a 1.2% YOY inflation number is actually more like 2.2% or more.  The Shelter index has been weighting it down.
Masked behind these seemingly benign near-term increases in inflation from what many deem as undesirably low rates to more “reasonable” rates are a number of longer-term factors that we believe could actually result in undesirably high rates of inflation in the not-too-distant future. Persistently higher rates of increases in food, energy and other commodity prices are leading to a divergence between the core rate of inflation that the Fed focuses on and the headline rate that includes food and energy prices and actually affects consumers.

Models used to forecast U.S. inflation can fall short, because they are generally not designed to incorporate fundamental changes occurring in the U.S. economy. Our expectation of higher headline inflation in the foreseeable future is based on our judgment as well as use of models while knowing and understanding their limitations. One of the key issues to consider going forward is that the emerging countries are transitioning from being exporters of disinflation to the developed countries to being exporters of inflation. 

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