This is one of the Fed’s pet inflation expectation indicators.

The commodity surge continues, and food/energy/import/export prices are finding their way into core inflation.

Fed funds futures still pricing in a near 100% chance of a 50 cut on March 18.

MBAVPRCH Index (Feb 15)

MBAVREFI Index (Feb 15)

These look very weak.

Banks are not included, so there’s a chance the banks could be taking market share from the mortgage bankers.

Consumer Price Index MoM (Jan)

CPI Ex Food & Energy MoM (Jan)

Consumer Price Index YoY (Jan)

CPI Ex Food & Energy YoY (Jan)

Today’s CPI report shows inflation is moving up sharply. If it was above Yellen the dove’s comfort zone last week it even further above it now. Same with Mishkin, who more than once said the FOMC had to be prepared to reverse course as needed.

Stocks are sensing they may be ‘on their own’ if the Fed is constrained by inflation.

Yes, the economy is weak, growth near 0 (see housing below), but demand is high enough to keep pushing food, crude, and import/export prices ever higher.

The Fed seeks an output gap/GDP growth consistent with inflation within their comfort zone.

Stronger growth will increase their inflation forecasts, while weaker growth is expected to bring inflation down.

Higher prices for food and crude are also presumed to bring out supply side responses, thereby bringing prices down.

But they also believe this has to happen before inflation expectations elevate, otherwise the higher prices get ‘monetized’ and a relative value story turns into an inflation story.

The data is now showing that is starting to happen, and for most FOMC time has probably run out. They may now feel they have used up all the past ‘credibility’ that has kept inflation expectations ‘well anchored’ trying to ‘forestall’ a financial collapse.

Housing Starts (Jan)

A glimmer of hope, but not much, but still winter numbers. Better picture will emerge by March.

Building Permits (Jan)

No sign of a turn here.

From Karim:

Core up 0.311%; with headline spurred by food and energy (each up 0.7%). Y/Y up to 2.5% from 2.4%

OER up another 0.3% and medical up 0.5%

Some items unlikely to repeat next month are lodging away from home, which was up 1.1%.

Also, apparel (which was up 0.4%) has now risen 5 straight months. This series usually chops around and like lodging away from home, has seasonal adjustment issues. Tobacco up 1.1% after 0.8% prior month. Expect all of these to reverse over next 1-2 months.

Maybe, maybe not. With import prices and local costs rising, cost-push-inflation can keep things moving up until all catches up with food/energy numbers.

Also, many wage agreements, including government, and other contracts have CPI escalators, which sustain demand for the ever higher prices.

Housing starts tick up 0.8% from downwardly revised December number; single family starts down another 3% to lowest since 1/91

Building permits down another 3% (typically leads starts)

Bottom line is Fed is likely to believe that the pattern of growth and inflation of the past two easing cycles will repeat itself (chart attached); that is inflation typically peaks about 2-3 years after the peak in growth. Fed Member Stern (voter) referred to this yesterday where he said he expected core to come down over the next several years but not anytime soon, and that recent rate cuts were ‘wholly appropriate’.

Agreed, they may believe that, but they also believe that if inflation expectations elevate, the higher prices get ‘monetized’ and don’t revert.

That’s why they are so focused on the inflation expectation indicators, which they also know are difficult to read and not considered completely reliable.

Should the Fed turn it’s attention to inflation, it will find itself way behind that curve.

The US cpi is about 100 bp higher than the eurozone cpi’s, including the UK where rates are north of 5%.

With US inflation where it is, the mainstream calculation for the appropriate ff rate is probably north of 7%.

The way the mainstream now sees it, the more the Fed cuts to get ahead of the ‘economy curve’ (whatever that is), the further it gets behind the inflation curve.

At this point if may not take much in the way of economic ‘improvement’ to redirect the Fed’s attention. A sign of a housing turn might be sufficient.

And with a general inflation underway, housing prices will go up as well, regardless of weakness, due to cost pressures, much like the late 70′s.

Highlights:

Russia exercising it’s pricing power as a swing producer as well.

Lukoil Cuts German Oil Exports by Pipeline on Pricing (Update1)

by Torrey Clark and Thom Rose

(Bloomberg) OAO Lukoil, Russia’s largest independent oil producer, may cut March shipments of crude oil to Germany by pipeline, continuing the halt ordered yesterday because of a pricing dispute.

Lukoil stopped February exports through the Druzhba pipeline and will consider cutting March sales while demanding higher prices from traders in Germany, spokesman Dmitry Dolgov said by phone today. The Moscow-based oil producer has reserved space in the pipeline for next month, he said.

“Why should we sell oil cheap?” Dolgov said. “We have found alternatives.”

German refineries tapped fuel from alternative sources last year to supply their customers when Druzhba shipments fell as Lukoil and Sunimex Handels-GmbH, the dominant oil trader, clashed over prices in July and August. PCK Raffinerie GmbH in Schwedt said the disputes haven’t affected output.

“We haven’t had any problems or production cuts,” PCK Schwedt spokesman Karl-Heinz Schwelnus said today by telephone.

Lukoil will renew attempts to sell oil directly to the refineries, Dolgov said. The company isn’t breaking any contracts by cutting shipments and the refineries are unlikely to run short of crude, he said.

“German drivers have nothing to worry about,” Dolgov said.