THE SMALLEST 12 MONTH INCREASE IN THE HISTORY OF THE CPI
Not to smash this point to bits this morning, but I entirely agree with Mark Thoma here:
“The smallest 12 month increase in the history of the index and people are worried about inflation? This might be a good time to repeat this chart from the SF Fed that I’ve posted here in the past:
When we look back at this episode, we are going to conclude that policymakers did too little, not too much, and what they did do mostly came too late.”
And as I keep repeating, monetary policy is a blunt instrument in a balance sheet recession. We need fiscal aid if we’re to overcome the dragging aggregate demand problem. Unfortunately, the new Congress is intent on reducing the deficit as they convince themselves that we are Greece. I think it’s wise that Ben Bernanke has implemented QE2 in order to stave off a credit crisis relapse (and yes, I still fully believe this is his intention), but overcoming this trend towards deflation will require much more than monetary policy, which is now impotent.
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.
Follow Me:
22 Comments
Well, by god, THIS oughtta really help our state job market out! (reprinted from Wisc state journal)
Three Republican Congressmen from Wisconsin have introduced a bill that would allow states to return money meant for train projects so it could be used to reduce the federal deficit.
U.S. Reps Jim Sensenbrenner, Paul Ryan and Tom Petri introduced the legislation Tuesday. In a statement about their bill, they applauded Gov.-elect Scott Walker’s opposition to Wisconsin’s $810 million federally-funded train project, but said the Obama Administration’s stimulus package “does not allow these stimulus funds to be reprogrammed for other worthwhile transportation projects.”
“We support Governor-elect Walker’s effort to put the brakes on the High Speed Rail budget boondoggle, which is why we introduced legislation, today, that would give states the ability to return federal funds obligated to high-speed rail projects, and instead use this money to reduce our nation’s $1.6 trillion deficit and $13.8 trillion debt,” they said.
You been to the supermarket lately? Or checked out your health insurance premium? Or bought popcorn at the local movie house? You see what the price of cotton is doing to the Chinese clothing manufacturers pricing models?
Low inflation is spin.
What we are really witnessing is the stirrings of ugly stagflation. For those of us who were actually out of diapers in the late ’70s, it’s all too familiar and obvious. For the rest of you, get away from your computers for a few minutes and go on a little field trip to real life.
TPC – I did something better than all of that. I checked the value of my home and realized it has declined more in the last 2 months than ALL of my expenditures on food and clothing over the same period.
TPC, while I agree housing prices are falling again, a lot of consumers are not feeling the “benefit” because they already bought a house or have a lease that that can’t be terminated at will just because your new neighbor’s got the same lease for $200 less per month. Lower housing prices will only benefit consumers who already don’t own a house or in a lengthy lease.
A rise or drop in the price of goods / assets can have two reasons.
A. Change of the supply or demand of the good (scarcity / abundance). In this case we could talk about ‘price inflation’ or ‘price deflation’
B. Change in the monetary base. This is called INFLATION or DEFLATION
Both can have the same effect on goods prices. If we look at copper and iron prices, the rise is driven by China’s growing demand – this is a rise in prices (price inflation) of type A.
Also the restrictions on Rare Earth exports from China has risen prices which is price inflation of type A.
The fall of home prices was caused by the collapse of the bubble. Demand got crushed so it is a price deflation – still type A – this has nothing to do with deflation.
These examples show a change in supply and demand for goods – which is type A.
But if the fed buys debt, or creates debt ( or money), then we have a change on the ‘money side’ which is of type B.
Type A reacts very quickly in the real economy – as everyone of us can confirm by own experience. Type B is by far slower and not shown straight away in the real economy. Further more it is not always easy to say what is driving the prices of assets. The CPI can not distinguish between both types of price changes. That makes CPI useless for any base of monetary policy. But let me tell you this, the fed is believing the CPI and is therefore acting the wrong way – because the fed itself doesn’t care about the cause of price changes – and this is ‘fatal’.
We are in an economic crisis. Prices of all assets are under pressure. That’s what the real economy experiences – deflationary pressure. But the fed is feeding with its policy future inflation. But (high) inflation will not hit any time soon the real economy, because prices are still under pressure. But this scenario might change in a view years…
That’s why we live in a period of high volatility. Some prices are under pressure because of ‘price deflation’ – type A, change of supply/ demand. Other prices may experience already inflationary pressure from the ‘money side’ – type B.
You’re ignoring the fact that inflation can often be built on the expansion of credit and the horizontal expansion of the money supply. The housing bubble was not just supply and demand. It was based on a bubble in the credit markets and the availability of money to people who did not deserve to be loaned that money (this led to excess demand and ultimately supply, but the availability of credit and money was what really led to the inflation pocket in housing). That has been extremely deflationary as the debt deleveraging occurs.
As I earlier wrote: Debt is INFLATION. So the housing bubble was caused by excessive credit growth which is no more then a increase of debt – this inflationary scenario stimulated artificially the supply side. When the bubble then burst deflationary pressure came into the market by a collapsing demand and deleveraging. The collapsing demand is price deflation – type A. Deleveraging started ways earlier, before the collapse of the bubble, by rising intrest rates – which is a change on the money side – type B.
It’s not always cristal clear what type of inflation/ deflation (type A or B) caused a change in prices. That’s why CPI is useless.
Ah. Gotcha. So how do you prefer to measure inflation?
A change in monetary base is Inflation / Deflation (changeing intrest rates, QE, money printing… everything the fed does to change the ‘money side’). A change in supply / demand of goods is ‘price inflation’ or ‘price deflation’.
Basically a change on the money side will lead to future inflation. Of course in a depressed economy the future inflation is postponed.
Now you will bring up the curious case of Japan: About 30 yrs. ago the US was lecturing Japan as it does today China. Japan should revalue the yen because of the US trade deficit. The yen was revalued upward from about 300 yen for one dollar to less than 100 yen for one dollar. The yen has appreciated more than threefold against the dollar since then. This is only under forced exchange possible.
So what do you think is the impact on prices in Japan? Japan doesn’t has many resources and commodities are traded in dollars! So at the same time Japan was ‘printing’ money, ‘producing’ debt, they revalued their currency against the dollar.
And guess what, the trade deficit worsened tenfold. What does that mean? Friedman’s MONETARY THEORY is simply WRONG!
Sorry… missed your question. Measuring inflation is not easy. But I would say that precious metals are most sensitive to inflation / deflation. Also commodities are quite sensitive because they are at the begining of the supply chain. But then again we have China with an impact on commodity prices.
The other problem with commodities is that much of the movement in commodity prices is now based on pure speculation and hedging. Not necessarily inflationary so much as its a bunch of bets on inflation.
You are absolutely right. There is the psychological factor, which can have a huge impact in todays world of debt leveraging.
Which is why the FED should be relieved of the employment mandate.
The employment mandate should be the responsibility of Congress so that they can be held directly accountable for the failure.
But CPI does not include house prices it has owners equivalent rent. Also I saw a comment today saying that the only reason the car price component fell was because the BLS judged that the ‘quality’ had increased, not that there was any fall in sticker prices.
If you look at a measure of inflation that is designed not to show any inflation is it a surprise that it shows no inflation?
TPC – The BLS has covered all the consiracy theories. I think it’s really unfair to say the CPI isn’t incredibly granular and thorough. Regardless, my index includes a housing component that much more accurately reflects the impact of housing. It shows higher inflation than CPI does, but still low….
Shadowstats.com
Aside from the changed weighting, the average person also tends to sense higher inflation than is reported by the BLS, because of hedonics, as in hedonism. Hedonics adjusts the prices of goods for the increased pleasure the consumer derives from them. That new washing machine you bought did not cost you 20% more than it would have cost you last year, because you got an offsetting 20% increase in the pleasure you derive from pushing its new electronic control buttons instead of turning that old noisy dial, according to the BLS.
When gasoline rises 10 cents per gallon because of a federally mandated gasoline additive, the increased gasoline cost does not contribute to inflation. Instead, the 10 cents is eliminated from the CPI because of the offsetting hedonic thrills the consumer gets from breathing cleaner air. The same principle applies to federally mandated safety features in automobiles. I have not attempted to quantify the effects of questionable quality adjustments to the CPI, but they are substantial.
Then there is “intervention analysis” in the seasonal adjustment process, when a commodity, like gasoline, goes through violent price swings. Intervention analysis is done to tone down the volatility. As a result, somehow, rising gasoline prices never seem to get fully reflected in the CPI, but the declining prices sure do.
How Can So Many Financial Pundits Live Without Consuming Food and Energy?
The Pollyannas on Wall Street like to play games with the CPI, too. The concept of looking at the “core” rate of inflation-net of food and energy-was developed as a way of removing short-term (as in a month or two) volatility from inflation when energy and/or food prices turned volatile. Since food and energy account for about 23% of consumer spending (as weighted in the CPI), however, related inflation cannot be ignored for long. Nonetheless, it is common to hear financial pundits cite annual “core” inflation as a way of showing how contained inflation is. Such comments are moronic and such commentators are due the appropriate respect.
sited in Shadowstats.com
Heritage58
Because of hedonics the Federal Government should be sending us all big money because of the increased pleasure they are deriving from totally shafting the free enterprise system!
Your chart appears to be incorrect. The O.E.C.D. chart shows Japanese inflation jumping to 2% late ’97 early ’98. Then going down to zero in mid ’98. Guess it dosen’t make much of a difference right now. But if that really did happen look out for the second quarter of 2011. It going to be a great chance to buy!
Here’s a field trip into “real life” – bought a new washer Sunday for $300, same size as the one I got 10 years ago for $550. In the past month bought the identical telephone set I bought 2 years ago, except with 1 more handset (digital – top of the line), today’s price $43, 2 years ago $130. Bought a new Garmin Nuvi for $109, the newest model, but comparable to my 5 year old one that cost $459. And the new laptop I got in August cost $800, an upgrade to the one I got 3 years ago for $2,000. Yes, food has gone up a little, fuel prices more, but other than that, I’ve got the proof that prices are dropping big time.
The real shock still to come is that no matter what the Fed does nothing works, post bubble, to prevent a deflationary contraction. During the bubble everything the Fed does seems to work in forestalling the Faustian bargain misleading folks to think that post bubble there is some secret elixir that will put Humpty Dumpty back together.
There ain’t no such combination of levers. Everything being done just makes it worse. Even with Japan as a guide we can’t figure it out.
The reason that people think that inflation is high is because the prices of the things they but every day; food, fuel and utilities are rising.
The counter examples appear to be price drops in consumer durables and housing. But these are occasional purchases, and ones which people postpone in a recession; or when unemployment is 10% and they fear for their jobs.
To be more succinct; the things that people are buying are getting more expensive and the things that people are not buying are getting cheaper. Therefore, people’s experience is that prices are rising.
However, one of the Fed’s objectives was to increase inflation expectations and that has been a success. Why they should think that this would inspire people to go out and buy stuff to get the economy going is anybody’s guess.
Last I checked food/gas/housing prices are all still WAY down from what they were back in 08. Anyone remember 4$ gas? I do. People will always cry about inflation even if it isn’t really there.
My wifes’ jaw dropped at just the one week rise in groceries from last week to this . Gasoline 3$ and rising . Yes healthcare ins AND home and auto ins. jumping by 5-12% . Its oh so easy to exclude food and energy , and the liars keep fudging the real numbers . Just keep drinking the kool-aid and repeat this mantra daily ” There is no inflation, There is no inflation . Statistics never lie , Figures never lie .” ….. There now , don’t you feel better Bunky .
This quote sums up the inflation trade, “When we look back at this episode, we are going to conclude that policymakers did too little, not too much, and what they did do mostly came too late.”
Investors are not investing for inflation right now necessarily, but they know we can’t avoid inflation in the future! How do you make money investing using the news story for the current day, by the time you read that and get the stats proving there is inflation you are far too late. We obviously have disinflation now if you want to use government stats, which I am not sure how anyone could possibly trust any government official, including their Fed buddies. Try using http://www.shadowstats.com or someone unbiased.
Face it, inflation IS coming, the route in which we get there is still possibly undetermined, but we will get there. So some may be a little early if they are purely investing for inflation, but if this article can say the policies won’t hit until the recovery or they were too late, is exactly why we will have inflation.
We have food and energy inflation right now simply for the supply/demand factor, forget the argument that the US is or is not printing money. (which according to the St. Louis Fed is showing a serious up-tick in the past few months) China, India, Brazil, and all the other countries are seeing a rapidly growing middle class and they want to eat more and more protein, and then go drive their new cars around. Thus driving demand up, while supply for farmland/food goes down because we only have a limited supply. We can’t create more farmland, you can say we can create more yield by using genetically modified seeds, but the weather crushed a lot of crops this year.
Not to mention the US is not seeing inflation because we are simply exporting to other countries right now. Why do you think the other countries keep raising their rates, to try to fight off the US exported inflation. At some point those countries will gladly ship it all back to the US, and then Inflation will be in our face, and possibly even hyperinflation, although it may be too early to call for that.