Inflation Update – Are Prices Turning up?

Today’s BLS reading on the CPI showed another benign price increase.  Econoday has a good breakdown:

“Excluding food and energy, the CPI rose 0.1 percent, following a boost of 0.2 percent in October. The median market forecast was for a 0.2 percent rise.

By major components, energy fell a monthly 4.1 percent after dipping 0.2 percent in October. Gasoline dropped a monthly 7.4 percent in November, following a decline of 0.6 percent the prior month. Food prices increased 0.2 percent, matching the pace in October.

Within the core, softness was led by declines in prices for apparel and also used cars & trucks.

Year-on-year, overall CPI inflation came in at 1.8 percent versus 2.2 percent in October (seasonally adjusted). The core rate eased to 1.9 percent in November from 2.0 percent the prior month. On an unadjusted year-ago basis, the headline CPI was up 1.8 percent, compared to 2.2 percent in October. The core was up 1.9 percent versus 2.0 percent the month before, not seasonally adjusted.”

I like to look at a number of independent inflation gauges since the BLS data is by no means perfect.  I created the Orcam Housing Adjusted CPI to focus on the weakness in the BLS data regarding the reporting of housing prices.  Because housing is technically listed as investment and not part of consumer prices, they adjust the CPI to account for rental prices.  This smooths out the CPI over the long-term, but can create a distorted near-term picture of the price changes.  For instance, during the housing boom the OHA CPI showed levels of inflation that were much more alarming than the data the Fed uses.  I believe such data could have helped policy officials sound the alarm on potential economic distortions sooner than they did.  By focusing on the change in prices in the rental markets we were vulnerable to believing that the price changes and easy monetary policy was more appropriate than it probably was.

This months’ reading in the OCA CPI showed a 3.2% year over year increase.  This was up from last month’s reading of 2.3%.  Although this indicator is showing higher levels of inflation than the BLS data I would by no means characterize this as an alarming level.

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • hangemhi

    i personally think we’re in the beginning stages of a new housing bubble… prices in formally decimated areas like Phoenix and Miami are on fire. In SF Bay Area it is a all multiple offers and prices are up 10+% yoy. This is an interest rate induced bubble thus far – now all we need is easier credit and new loan products which is how the last bubble kept marching on every time people thought it had peaked. Lending is still so tight, that there’s a lot of room for loosening. Hang on to your hats, it is 2004 all over again

  • Not an Economist

    “i personally think we’re in the beginning stages of a new housing bubble”

    Completely agree. I live in Ladera Ranch, CA, which 2 years ago was labeled “Zombieland” and the epicenter of the housing crisis:

    http://money.cnn.com/2010/12/07/real_estate/ladera_ranch_foreclosure.moneymag/index.htm

    Fast forward to today and there is virtually zero inventory, houses sell within 2-3 days of being listed on MLS (unless they are already under contract BEFORE they hit MLS), and many sell at or above asking based on multiple offers. I know this to be factual as I have been trying to buy for the last 9 months – and I am not the problem – i.e. financing is no issue, 20+ down is no issue, no need to sell my current residence, I have made offers on 9 properties (some ABOVE asking price), etc. Prices are rising WEEKLY as homes are listed, sold and the house next to it is then listed at a higher price. Prices are still well below the peak, but in just 2 short years more than half the decline has disapeared…

  • http://www.nowandfutures.com bart

    My CPPI (Consumer Purchasing Power Index) also adjusts for many housing issues like the rent balance one, OER accuracy, moving frequency changes, Case Shiller differences and many more.

    And it apparently leads yours in trend changes as best I can tell, whether you believe the absolute inflation levels shown or not.

    http://www.nowandfutures.com/images/cppi_vs_cpi_short.png

  • http://www.orcamgroup.com Cullen Roche

    And assuming you believe there’s 6% inflation right now with an economy that is stagnant, declining oil prices, stagnant wages….Something in that indicator doesn’t add up. There is simply NO WAY there is 6% inflation right now. Even Shadowstats is showing it lower than that….

  • whatisgoingon

    Cullen does higher but still low cpi inflation with slower but still positive GDP growth fit with your view for 2013.

  • Johnny Evers

    Gasoline prices are still twice what they were 8 years ago. A gallon of milk is up 25 pct in the last eight years.
    Tuition: In 1980, tuition at the U of Michigan cost 12 pct of the median family income; it rose to 40 pct in 93-94 and 76 pct a few years ago.
    Social Security — my clients on Social Security tell me their COLA increase last year was immediately swamped by higher Medicare premiums.
    Health care insurance for a family of four has doubled since 2002.
    I don’t have an index or chart that reflects how my cost of living has risen but I feel it every month when I am balancing my checkbook and when I am trying to figure out how to retire and pay for my kids to go to college.
    Inflation is definitely higher than reported and the financial press goes along with it.
    I wish I knew why.
    I suspect it’s because people in the financial services community benefit from inflation (rising asset prices for their investments, and loans create business) and are disconnected from ordinary Americans.

  • krb

    Cullen,

    Several months ago, I don’t remember the topic anymore, I opined in the comment section that a more realistic view of inflation’s impact would be to define it by a reasonable number (4-5?) of “lifestyle” categories. For example….

    1. Single, college age; inflation gauge to include would be food, energy, clothing, electronics, healthcare, college costs, rent, etc …..things impacting a single, college age person.

    2. Young married, no kids; inflation gauge to include food, energy, clothing, electronics, healthcare, rent, etc …..things impacting this demographic.

    3. Middle age married, with kids and house; sames as above but housing replacing rent, etc.

    4. Near retired married, kids grown….

    5. Retired couple, kids grown, house paid for….

    6. Retired couple, kids grown, house replaced by assisted living…..

    My point is that any general inflation gauge potentially/likely misses real life impact by a wide margin depending on the age group. I specifically think the retired and elderly are getting hammered in our current environment because they are past the time when many of the low inflation consumption categories impact them while still being impacted by the higher inflation categories….and of course their income is now fixed. I also don’t think it would be difficult to calculate and track. And when the differing inflation impacts become visible it would lead to new and production discussion about policy choices. I think an education-focused site like PC is the perfect place to tackle a concept such as this. What do you think? Thx, krb

  • krb

    I second all of this. krb

  • krb

    “….producTIVE discussion…” sorry

  • Bond Vigilante

    1. The financial press goes along with it because these folks have mortgages (too).
    2. The healthcare industry wants each year higher profits.

    And all this inflation is actually VERY deflationary.

  • http://www.orcamgroup.com Cullen Roche

    KRB,

    I think that’s a good assessment. I like to say that inflation is always and everywhere an uneven phenomenon. It impacts different people in different ways. I’ll have to write something more comprehensive on this.

    Have a good weekend!

  • Andrew P

    History says that bubbles almost never repeat, so either you are describing a local anomaly, or a mini-echo bubble that will crash and burn in fairly short order. It certainly won’t last as long as the big housing bubble did.

  • Andrew P

    Inflation in bar tabs has been pretty sharp. Not only is the cost of beer up modestly, but the cost of chicken wings has blown through the ceiling.

  • Tom

    True. The difference is the last bubble was private sector and the FHA (if continued to be allowed to do STUPID things like be the “low cost lender” for mortgages up to the $700K area and let everyone buy a house for 3% down) is the enabler. Again it wont be like 2005-2008 but the govt, if it wishes to piss money away to build bubbles, has been willing and able in the past.

  • Tom

    Dear Cullen,

    My indicator shows PSCPI reads 15% inflation right now.

    Sincerely, Pete Schiff ;)

  • Tom

    It is very easy to explain why. See how they are going to “fix” Medicare – moving to chained inflation. If true inflation was reported they’d have to give COLA increases in many areas of government and that would more quickly “bankrupt” (sic) government.