THE DEFLATIONARY SHOCK….

David Rosenberg makes some interesting comments in his morning note regarding the price action in US Treasuries.  He cites the rally as a sign that the world is concerned about the deflationary shocks from rising oil prices:

“It is also interesting to see how government bond markets are reacting to the oil price surge — by rallying, not selling off. In other words, bond market investors are treating this latest series of events overseas as a deflationary shock.”

I think Rosey has this one spot on.  The risk of rising oil is not a hyperinflationary spiral, but rather a deflationary spiral.  Oil price increases are cost push inflation of the worst kind and for a country still mired in a balance sheet recession that means spending gets diverted which only gives the appearance of inflation in (highly visible) gas prices while creating deflationary trends in most (less visible) other assets (have a look at today’s Case Shiller housing report for instance).

The environment is not really so different from what we were experiencing in 2008.  What we have in the USA is an underlying balance sheet recession being papered over by government deficit spending and very easy monetary policy.  The math behind our economic plight is quite simple.  Since we are running a -3% current account deficit the government MUST spend to the tune of 3%+ of GDP if the private sector desires to save.  And that’s exactly what is occurring.  In fact, the 10% deficit is allowing the private sector to save quite a bit (roughly 7%). Make no mistake, the deficit spending of the last 2 years is what has generated recovery.  This is far from organic growth, but as we learned in Japan and during the Great Depression, the alternative is to risk something worse.  Unfortunately, our implementation of the recovery plan has been mangled at several steps along the way so it is primarily Wall Street that has benefited while Main Street continues to suffer.   I attribute this lopsided recovery in large part to the actions of the Fed.

The Fed’s dual mandate has them tinkering in the markets far more than they should and the repercussions are disastrous psychological impacts.  They manipulate rates, bailout the banks, and generally implement policy that is based around creating a healthy banking system.  After all, that’s really all their tool set can do anyhow.  Not surprisingly, their policies over the last 20 years have helped in significantly financializing the US economy.  The results of that world speak for themselves.

Today, in a misguided attempt to create a “wealth effect” via equities it appears as though Ben Bernanke has helped to generate a speculative boom in many commodities.  This is not the direct cause of the unrest abroad, but it’s certainly not helping.  But perhaps more importantly, the environment that Ben Bernanke is creating (commodity bubbles) actually increases the risk that we will relapse into a deflationary spiral (the very thing he is attempting to combat).  After all, if the global economy slows once again it is highly likely that we will see price action that was very similar to 2008 – a flight to safety in US Treasuries, USD, commodities get crushed and equities sell-off.  Today’s action is a small example of that sort of fear trade.  And make no mistake – this is not hyperinflationary price action.  This is deflationary price action.

For now it still appears as though the US economy is strong enough to generate low single digit inflation, however, if the commodity bubble were to worsen or oil prices were to cause a global recession (this looks increasingly likely as we head into summer) we are likely to find ourselves revisiting our deflationary discussions as opposed to fears over hyperinflation.   This is not the 70’s and it is most certainly not Zimbabwe or the Weimar Republic.  This is still an environment more akin to Japan and the 30’s.

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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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Comments

  1. TPC, do you think it is possible we simply have seen somewhat of a peak in economic activity in our country? I’m not sure the majority of people in the US can afford to live here anymore.

    It seems we are seeing the EMs exporting wage deflation and commodity inflation at the same time while we sit back and try to figure out how to deal with this new global environment. This is a 180 degree turn compared to the last 30-40 years. I’m not sure how this will get turned around.

  2. I spoke with a small business construction contractor yesterday and he informed me aluminum prices from the wholesaler are going up 14% as of March 14. He anticipates that other materials will also be going up.

    These inflationary price increases will turn out to be in fact deflationary for the larger domestic economy. Same can be said globally, take Europe as an example: they are experiencing price inflation at the same time that austerity is the general policy orientation. This too will be deflationary. Same for China, India, etc.

    Spot on: “This is not the 70′s and it is most certainly not Zimbabwe or the Weimar Republic. This is still an environment more akin to Japan and the 30′s.”

  3. Is it possible that the “housing bubble” resulted in over-priced housing and that the market is still adjusting for this? If this were so, the deflationary aspect to which you refer is not quite as strong as you assume. It seems deflation has a whole lot to do with the U.S and very little to do with emerging economies (oil-producing countries included). In fact, it seems that our deflation emerges in other countries as inflation. (Could this be where our expanded balance sheet has shown up?)
    Like you, I feel very uneasy over the present global imbalances.

  4. Best stuff you have written in a while. You described the economic reality of today very well.

  5. Breaking down which sectors are experiencing inflation (oil–cost push) versus which are experience DEflation (housing, etc) is a very good way to avoid arguments about are we in an inflationary environment or deflationary. Good work!

  6. Welcome to newspeak in 2012.
    Rising oil prices are not inflationary!
    Printing money is not inflationary!
    Higher the prices go, more deflation we get. I am feeling richer by the day, especially when I fill up at the gas station. I love when the prices go up.
    How is this different from Gadaffi saying that the protesters are on hallucinating drugs?
    Furthermore Rosenberg is an idiot, he has been wrong in everything he has said these past 3 years. Why anyone listen to him is beyond me.

  7. Cullen your analysis is spot on the money. And Rosenberg has not been wrong for three years Cassanova. It is only two years and he has not been wrong in his analysis, we have just had our Fed and government step in with over $2 trillion each year to put off what is going to eventually happen anyway. Now the Fed and government are together spending another $2.5 trillion for this year to stave off deflation. Yes Rosenberg may have had his predictions undermined by all of this outrageous spending ( which allowed the banks and traders to make a ton of money), but we are now in a much deeper hole to climb out of. And more and more lately there are other top notch finance analysts saying exactly what Rosenberg has been saying. So Egypt took the market down a little two weeks ago. This week we are getting hit by Libya. Next week Ireland with their elections and probable default are next. Then at the end of March Portugal is front and center to be bailed out or default ( or as we now say restructured). Soon after Spain is on deck with even more problems than Portugal. All the while during which we have cities and states all over America in the midst of being insolvent and facing financial crisis. Oh and did I mention that the housing market is hitting its stride going into a double dip. Add to that what $100 barrel oil will do to the world economy ( as it did in 2008), and I would say that the facts speak strongly that Rosenberg has been right all along, we just decided to print money to put off paying the piper.

  8. Rosenburg has pretty much been 75% incorrect over the past two years billw. If he were a trader, his stake would be completely wiped out. His die hard adherence to the recession call this summer, months after it was obvious it wasn’t in the cards, is what eventually caused me to largely disregard his commentary. For the most part, I delete his daily commentary without reading in my inbox every day. He, like so many bulls and bears a like, has a hard and fast agenda he sticks to, damn the facts on the ground. That’s my opinion at least. It doesn’t matter what this government did or that government did to bail whomever out – you get to trade and analyze the markets you’re given, not the ones you want, a fact Rosenburg might do well to learn. So now, Rosenburg has not been right all along. Being a Rosenburg is the worst kind of personality to take on in this business – it’s far better to be a perma-bull because history is always on your side directionally. But yes, like the perma-bulls, should the world come to an end again, like a broken clock, Rosenburg will be right every once in awhile…

  9. Yea, the cost of everything we purchase in our everyday course of living is going up. Be it food, gas, medical, education, taxes, user fees, clothing, you name it and it’s all going up and yet they tell us it’s DEFLATION! Sounds like the Michael Boskin, if beef goes up they buy chicken, school of economics to me. I guess what really amazes me is that people actually believe this stuff. Every time i read this deflation line I keep waiting for Rod Serling to come out from behind a curtain and say welcome to the Twilight Zone.

  10. Correct. Commodities are a buffering system as Jim Rogers (correctly) states: “the cure for high commodity prices is high commodity prices”.

    So, like many others, I expect to see a noisy, spectacular period of commodity price inflation (that we are in now) leading to a blowoff and a major collapse as the reality of overflowing inventories in an environment of weak demand hits home. This leads to deflation, not inflation.

    How clean it all ends up being depends entirely on political events in the Middle East. The way things are going, it’s entirely possible that Saudi Arabia falls and then things get extremely messy. The consequential wars would be highly inflationary (as they always are).

    In summary then, whether or not this ends up being inflationary or deflationary in the near term depends on whether or not war begins. If the situation remains *relatively* peaceful, then we end up with deflation. If we descend into widespread conflict then we get inflation. Stimulus to the industrial/military complex would boost the US economy but this can hardly be considered a good thing.

  11. Let’s look at what’s down vs last year:

    Appliances -3.4%
    Furniture -2.7%
    Footwear -1.4%
    Canned veggies -1.8%
    Frozen veggies -1.6%
    Decorative items -7%
    Computer software -10.3%
    Frozen prepared foods -1.5%
    Girls apparel -2.5%
    Personal care products -1%
    Health insurance -4.4%
    Toddler apparel -2.8%
    IT and hardware services -3%
    Mens shirts and sweater -1.4%
    new cars -0.8%
    Personal computer equipment -7%
    TVs -18%
    Utility gas service -6.4%
    Wireless telephone services – 4%
    Women’s apparel -1.5%

    So no, your comment is not even remotely correct.

  12. You have to forgive TPC –he is much confused like Greenspan and Bernanke

    The govrnment has weighted the components of CPI to eliminate Inflation

    consequently–Neither of these “Illuminati” can see Inflation.

    Inflation? What Inflation–CPI is Proof?

    BTW–Health Insurance has not gone down in Price.

    The balance sheet “Depression” while precise is not the only issue facing the economy.

    Demographic trends and boomer spending patterns are negative for the next 10Yrs

  13. I have a question for you. Not surprisingly, disposable income and CPI have a VERY high correlation. So, your accusation that the govt lies about inflation would also mean that they are lying about how much money we all make. Do you see the inherent conflict there? According to you the govt is telling us we’re poor so that they can lie about inflation….Something doesn’t compute with your conspiracy theory.

  14. TPC,
    more than 90% of your examples are items that you buy once every 1 , 2 , 3 years or more and dont have any meaningful impact on the monthly family budget.
    The items people pay for every month are food, energy, education, insurance, healthcare and have been all going up on price constantly.
    They never came down for that matter even during the recession.

    I take issue with intellectuals like you that by using economic jargons and gibberish sentences confuse the working man as to what is happening and what the FED policy is doing and have complete disregard for the simple everyday reality.

    “Rising prices will lead to lower prices” do you realise what kind of nonsense are you writting?

  15. yeah, I am sure had he known about what FED will do, he would have made better predictions.
    Also, if my aunt had balls, I will most probably call her uncle.

  16. Really? Your car doesn’t impact your monthly budget? Your home? Your cell phone? Your computer? Your TV? I know these are items that you don’t think about every day and don’t pay for weekly, but these are big ticket items that most certainly impact the family budget. I’ll 100% concede that the energy story is a complete nightmare. But let’s take a look at food and medial just to put things in the proper perspective:

    Medical:

    This is not just some ridiculous academic argument. These are the facts. You are blowing things way out of proportion because you see gasoline prices surging every day….The truth is that inflation is very low by historical standards…

  17. TPC:

    I did not say the govrnment was lying about inflation.

    What I said:
    The govrnment has weighted the components of CPI to eliminate Inflation

    Any price series can be weighted to achieve a result- Statistics 101
    Is that lying–no thats just data manipulation.

    Why does the gvrnment care so much about the CPI?

    It is the adjustment factor for Social Security cost of living increases.

    You must know that Independent data show the CPI much higher

    consequently your chart should look like an X
    With prices going up left bottom corner to the right
    Real disposable income going down from Left Top corner to bottom right

    As anecdotal evidence — recently the Chinese Govt recalibrated there CPI with less weight for the items that were going up in price and pushing that story on there national TV. The fact is that they reduced the food component.

    They learned that from the US—Inflation–What Inflation

    What would happen if the St.Louis FED put out charts showing Inflation off the charts??–you know that answer .

    Dorothy your not in Kansas anymore–we are on the yellow brick road.

    The govrnments chart on medical cost is false.
    IF it is true why did we need obamacare so save us from uncontrolable medical cost??? Please

    Here is something from the Atlanta FED–Feb 18
    http://macroblog.typepad.com/

  18. Dear Cullen Roche,
    I think this is your best work in recent months, spot on! But I am concerned that you and your commentators are giving me the impression that your country is an impregnable fortress, and you appear as though you are just amused bystanders at a football match, whereas I see you sitting on a time bomb, and the Fed and the US Government are the detonator. I believe that public mood has been souring at an exponential rate since January 2008. It has been obvious in Greece, Ireland, Portugal and Spain, where those populations have accepted that they have a problem. Egypt, Tunisia, Libya, discounted the problem, thought they had it under control, then it exploded. The Germans rose up recently in violent anger over the construction of a new railway station in Stuttgart. No way is that amazing. The Politzei turned fire hoses on the demonstrators (that is both amazing and foolish), and it is still a smoking bomb right now for Merkel. Your country is like an alcoholic in denial, unable to accept that it has a problem. But the souring of public mood is there with you, and though it is not yet obvious (as it was not in Egypt), the inequality being fueled by Bernanke and co. will explode one day. Nobody cares about the 80% of the country going backwards in opportunity and economic health; they can’t do, because all the financial help goes to the banks and the market players who represent about 20% of the population. Screw the savers, those who try live off interest on their savings. As their savings run out, they watch their house values continue to sink, and true unemployment grows at a devastating pace. Public mood in the US can be violent, as violent as Egypt, or worse. I think you should be more concerned than you show. The negative mood has been a growing worldwide groundswell since early 2008, and it is not showing signs of slowing down. How long will US citizens put up with this? Probably longer than I think, but it will get ugly sometime soon.
    Michael Cullen

  19. Ferro,

    you are right to criticize his inflexibility regarding the recession and the avoidance of stocks, and maybe he was “intellectually” short stocks, but not in his recommendations. His trade calls were:

    – long bonds -> worked well till Q3 2010
    – long HY
    – long gold -> continues to work
    – long commodities
    – long munis after what he thinks a technical / panic sell-off -> this one still remains to be seen if right

    So as you see, his calls are quite ok. What he tries to argue (intellectually) is with the “Pavlovian” bulls and the overspeculation on Wall St., which he is also right about.

  20. US gov’t should cease to spend so much in the coming years, and the Fed should decrease it’s degree of intervention in the market. Question is, will consumers by then pick up? How long can it take for growth to find new drivers?

  21. Dir sir,

    Unfortunately, I believe you have it wrong once again.

    From all data and macro indications that I have seen, I do not believe we are looking at a “Deflationary Spiral”. If anything, the most obvious situation we are beginning to see develop is “Stagflation”; not unlike the one the USA experienced in mid to late 70’s and which was finally tamed by Volker and the Reagan administration in the early 80’s.

    Just because the USA and Europe are still in economic doldrums does not mean the rest of the world is. Asia and India have been booming comparatively so. Their demands for resources and energy will continue to push up inflationary costs along with the US government’s debasement of the US Dollar (through theft of individuals’ wealth). And in the USA anyway, the vacillating economic data along with weary consumers and CFO’s will continue to encourage job growth stagnation.

    The ingredients are all there, and the cake is in the oven. If the US Legislature, President and The Fed do not take away the match (QE), this Stagnation cake may bake away for the next 5-10 years.

  22. Where ever are you getting your “numbers” from?
    (You don’t even post the “source” for your data?)
    From my personal experience, I have seen ZERO decrease in the cost of:

    Food (Prices in the stores increase nearly weekly)
    Energy (Gas is now over $3.10/gallon; electricity costs are increasing)
    Healthcare (my premiums rose better than 20% for 2011)
    Cable & Wireless (my monthly rates have increased over the past year)

    About the only thing I have seen drop in cost or at least stay pretty flat is clothing costs. But I believe we shall start seeing that increase this year as well. How can it not!? With the cost of transporting materials and finished goods to market increasing monthly, how can it do anything but go up?

  23. “Furthermore Rosenberg is an idiot, he has been wrong in everything he has said these past 3 years. ”

    simpleton…. Rosie has been absolutely right on bonds (especially corps, which outperformed stocks in 2009) and gold. call him ‘wrong’ on stocks if you like, but his calls have killed the market (and likely your portfolio) over the last 3yrs

  24. I notice that your list only includes 2 items relating to food: both being of the prepared type and not an accurate relation of present food prices. I suppose food isn’t what we spend our money on, either.

  25. for some folks, evidence is unwelcome.

    the interesting part is if/when the capital markets start to discount the pressure that should first be visible in profit margins. market pricing is clearly being influenced heavily by near-free leverage for the speculative complex.

  26. Cullen – Why do you find monetary policy more harmful than fiscal policy? Both seem to create “fake wealth.” Does it come down to the discussion we had with Scott a couple weeks ago, regarding the “wealth effect” requiring further leverage whereas fiscal policy helps delever?

  27. Cullen, I don’t know how you got your numbers about everything going down by a percentage point or two. But the health insurance shot up 40% for me. Gas price is out there every day, and so is the food price. If we look at your number, its deflation. But I am not sure that’s where the deflation is coming from (question of your numbers). housing price going down, wages stay flat or going down are the major forces of deflation, not frozen veggies (I doubt it actually went down in price).

  28. I am not sure that our present economic plight isn’t as bad as the Great Depression. First of all, economic statistics were collected quite differently back then rather than today. Statistics prior to 1940 were mostly raw numbers, compared to the more refined and massaged numbers we get today. Second, the Great Depression mostly affected blue collar workers and farmers. The Middle Class fared fairly well. Today the present economic downturn is affecting the Middle class particularly hard. Third, while the Great Depression was a severe downturn, the plight of those most affected was greatly dramatized in order to pass a political agenda. Many people who were Middle Class did not know there was such a thing as a Great Depression until they read about it years later in history books.

  29. largely no, in the US. much bigger deal of course in many emerging market societies.

    imo too many people are misguidedly attributing some price increases — which can originate in speculative demand, real demand increases of a local or global nature, real supply restrictions of a local or global nature — to a purely monetary effect as though that can be its only headwater. sorry, but friedman’s famous quote is also famously wrong, particularly when applied only to some commodities and not all goods.

    it should be clear by now that systemic leverage in the united states is continuing to fall in spite of the best efforts of the government to create an income stream (through spending) which would support high systemic leverage. instead the private sector is continuing to reduce balance sheet, leaking that government-generated income back out of the cash flow cycle, keeping the actual supply of money and credit tight.

    what’s driving commodity pricing isn’t dollar devaluation. seems to me it’s partly demand shock from large third world societies, partly supply restrictions (especially in food and energy) as capacity hasn’t yet been or cannot be built, and partly the effect on global speculative balance sheets of low interest rates in heavily financialized carry trade funding countries like the US.

    with end demand in the major consumer societies still weak — which is why finished goods and services pricing as cited by tpc remains very weak — the effect on profit margins could be spectacular.

  30. Steve,

    Both sets of my grandparents (1 set farmers…1 set blue collar workers) did not realize they were living in a Great Depression for 2 reasons:

    1) they were not constantly exposed to the media outlets that we are today
    2) they had no debt

    The people most affected were those who had debt. For most of the rest…it was a matter of living within their means as usual.

  31. To those who want to compare the current environment to the 1970s…please look at the Long Term Historical Chart of M3:

    http://www.shadowstats.com/charts/monetary-base-money-supply

    The inflation of the 1970s was primarily to do a sharp YOY increase in M3…which led to a lot of money chasing few goods. As you can see from the chart the M3 YOY has actually been DECLINING over the last couple of years. It just started to increase the middle of last year when consumers began their releveraging spree. For reasons listed above…as well as others…I do not see releveraging to be sustaining for the long term…and the higher probability is that we are in the early stages of a long term DEFLATIONARY trend that will be a welcome cleansing to the financial system. IMHO.

  32. Did you look at the food chart I posted in the comments above? Nothing really all that unusual. I’d like to see some facts on US food inflation next time. These rants about food, education, energy, healthcare, etc are rarely backed with facts….

  33. Where does the gov’t get their income numbers….hopefully the employment numbers aren’t used as a multiplier.

    According to my local gas station pump price fuel is going up and according to my grocery bill as a % of my fixed income this slice is going up and for every other item that the American middle class is in want to purchases is considered carefully as it is categorized as a luxury item when paid with cash. Forget about the government statistics…like the federal budget, bank statements and whether we will hear a sucking sound of jobs the governments reality resides in another dimension.

  34. Cullen,

    How much an impact on GDP is it when gas price (consistently) rises 50 cents? Take 0.5% off, 0.2%? Do we have the data?

    Thanks.

  35. TPC,
    a follow-up to yesterdays rosenberg report, while he again talks about the bond market considering the oil price increase as deflationary, later on he goes on to say “The surge in oil prices in going to bite as well, in addition to the food run-up, this represents about one-quarter of the US consumer spending bucket and closer to half in many emerging market economies”.

    With oil being 25% of consumer spending, and food prices as we all know having seen large increases and also being a large part of the consumer bucket, how could we still think of this as potentially deflationary. Even oil by itself being 25% would almost outweight everything else, but oil and food combined definitely would. Maybe i’m missing something here and i’d really like to understand the rationale.

  36. From Merrill Lynch:

    “The recent surge in crude oil has raised the possibility that gasoline could hit $4 by the peak summer driving season. The big danger is that saber-rattling in the Middle East or an unexpected refinery shutdown could push prices closer to a sawbuck a gallon. Given that Americans use about 378 million gallons of gas per day, each dollar rise in gas prices, if sustained, means $2.6 billion a week must be diverted toward the gas pump and away from other spending.”

    That’s roughly 1.4% of consumer spending. So if consumer spending is 60% of GDP then this could ding GDP for about 1%. The more worrisome impact is on corporate profits. How much is this going to crush margins?

  37. The bottom line is that it can’t get pushed through. The economy is way too weak. All it will do is compress margins and divert spending. The difference between today and the 70’s is that disposable income growth was about 10% back then. Today it is about 3%.

  38. I think what TPC meant was that the higher oil prices may/will lead to deflation (in CPI) in the future, hence higher oil prices are deflationary.

    Another way to look at this is that a person with same income a year ago, will need to pay a larger portion towards gas (a necessity that cannot be avoided)… and hence will have less to pay towards other things, thus reducing demand for other things and hence leading to a general decline in prices of other things… thus deflation.

  39. Hey TPC,

    TPC, I did not know where I should post this question I have. It may not be appropriate here, but can you comment on this please?

    I understood from various resources on this site that when the US Govt has to spend (according to budget outlays or other obligations) US Govt spends dollars (No bond selling… No searching for reserves in Treasury… No calculations about future tax revenues etc… ).

    But after it has spent the money/or while spending the money… Is the US Govt by law required/obligated to sell bonds equal to the deficit expenditure? If this operation is not required, then what is the purpose of debt ceiling?

  40. “Really? Your car doesn’t impact your monthly budget? Your home? Your cell phone? Your computer? Your TV? ”

    My car is more expensive to operate and repair than just 10 years ago. Home prices have gone through the roof until recent price adjustments when home values dropped below equity values so you could argue that it has negated all other forms of inflation (my gas bill has gone up and so has my air conditioning bill), my home phone line used to cost me $100 a month with no cell bill now both my wife and I pay $200.00 and of course your kids need a cell phone and even though I’ve eliminated my home phone my internet is $40.00 a month, my cable tv keeps keeps going higher and every year I opt out of more premium packages, my tv used to cost me $300.00 now it cost $750.00.

    My company medical plan (i’m lucky my company offers a medical plan) continues to narrow what it covers while increasing my premiums AND my deductible.

    Cullen…don’t make the error in believing statistics don’t lie…you know they do and empirical evidence is still where the rubber meets the road in the eyes of the middle class.

  41. I am not saying that there hasn’t been inflation in the last 10 years….I am saying that inflation over the last 12 months has been extremely low….

  42. excuse me, but the obvious nonsensical number you posted at 10:09PM on 2/22 was healthcare premiums down 4%.
    as far as i am concerned, until you back up that number with very tangible evidence, you have absolutely zero credibility for everything you post. you might start by listing the names of at least 100 LIVING United States citizens whose health care premiums have gone down recently. anything else is unsubstantiated rubbish.
    presumably, you sourced the data from the BLS (or whoever measures the CPI), but you can’t legitimately publish that kind of nonsense without being assailed.

  43. Most of electric apliances (to day electronic) items where not going up during the inflation of the 70’s.
    They are the positive deflationary items that come with innovation, efficiency and mass production. It also contradicts how a target of 2% inflation is needed.

    They have manage to keep there price despite of Government intervention not because of them. Prices would be even cheaper if they got out of the way.

  44. That’s how economics works. You pay more for better stuff. Everyone here wants to say that the govt is in the business of skewing the data and misleading us all. The typical response is that hedonics are wrong. Well, is it accurate to compare a house in 2011 to a house in 1970? Or a tv from the 70’s to a tv today? No. First, there are upgrades across the entire product line. More importantly is the productivity component. You pay more for a washing machine today because you no longer have to waste 4 hours a day cleaning your clothes in a river. This allows you to go do other more productive things while you put your washing machine on autopilot. Inflationists want us to believe that we have somehow been robbed of our wealth and well-being. That’s nonsense. I am infinitely more productive today than anyone was in the 70’s. That’s due to the multitude of changes along the productivity chain. The cost is higher prices. Yeah, because I can get 10 times more done in a day than I could have in the 70’s…..

  45. How is Rosie wrong when he has basically been long gold and bonds during these past few years? If you look at the returns of the two – seems to me he has been pretty right.

  46. Thanks Tim. This idea that we have been robbed of our prosperity is insane. Do you want to go live back in the 30’s or the 1800’s? Be my guest. Go and take all the fear mongerers with you.

  47. If in fact they do have the same income that will not cause deflation it will take the price of oil and oil related prices up against the price of other goods that would have to come down proportionally. That is not deflationary it would be neutral.

  48. Hi TPC, I think one reason that a lot of things got cheaper in the US is because people’s buying power in US is eroded by taxes and housing cost. More often than not, things that are made in Asia are sold much cheaper in the US than in Asia. With energy cost goes up (which Americans depend on a lot more than a lot of other countries), the US consumers will have even less spending power. The so-called QE actually creates “wealth effect” for the rich and “poor effect” for the poor.

    Just my 2 cents.

  49. Well said.

    A little less emotion and political charge. A little more logic and reasoning.

  50. #2 is a very interesting obserbation that I had not considered in comparison to the current economic crisis before. Of course, it brings us back to deleveraging, which brings us back the balance sheet recession and how that fits in with comparing current conditions to Japan’s Lost Decade(s).

  51. Energy is unique in that it can be forced upon us. I do not at all reject the notion that our dependence on foreign oil is disastrous. But on the whole, the inflation the USA incurs is not monetary or due to govt malfeasance (some level of it is, but it is relatively benign). It is due to the fact that we are rich as hell (and by “rich” I mean incredibly productive). Our incomes have always outstripped inflation by a substantial margin over the last 100 years (people pay more for productive workers). So, what we basically have is a bunch of people making more money complaining about a marginal increase in the cost of their lunch. Are we really worse off than we were 100 years ago? Everyone has cell phones, access to laundromats, flat screen tvs, mcmansions with all the upgrades, etc. Are we really worse off?

    Where it gets messy is with the income inequality. Inflation certainly hurts the poor more than the rich. How do we fix that? Well, a good start is by slamming some banker faces into the concrete through regulations….A second step is ending this insanity at the Fed.

  52. TPC I agree with you. The imbalance between poor and rich is the key. Rich does not care if the gas is 3.00 per gallon or 10.00 per gallon but the rest do wait in the long line of Costco gas station to get it 30 cents cheaper.

    And the tricky part is, it appears that our government lower the tax for the middle class but the price increase in food and gas take it back right away and some more.

  53. One of the best sparing over inflation vs deflation. I agree the data our government uses is skewed to meet there means. Look at NAR and the housing data! Garbage in garbage out!

  54. The wage deflation in the eurozone against the false metric of a slow cpi inflating euro is a form of inflation – the euromasters do not want to spend if it violates their precious 2% rule – even on capital spend.
    The situation in Ireland is beyond absurd – the money supply is falling like a rock yet the poltical debates are about tax – they even want to tax water in Ireland !
    The medium of exchange function of money is dying as people hoard their euros – its impossible to get immediate foregin currencies in banks other then sterling which tells me the BOE is doing more legwork then the ECB to keep the ship afloat.
    Amazing – I get the feeling the ECB does not like us anymore – even when we were the best boys in the class only 5 years ago.
    We’ve been shafted

  55. Seems to me that deflation can look an awful lot like hyperinflation to the average person. If prices stay the same or go up a little but my income drops a lot its the same net effect of prices rising faster than my income. We get too obsessed with the “price” when its how real activity is affected that we should be looking at. A collapse of wages or a collapse of currency ends up in the same place for most people. At least the distribution of hyperinflation affects the wealthy too. Severe deflation mainly affects those with income and not much real wealth. Since all the real wealth is held by a few people deflation ends up not hurting them as much as they are able to pick things up on the cheap and add to their stores of real assets. I’d rather we err on the side of hyperinflation than severe deflation. Its easy to pay my nominal contracts in hyperinflationary times.

  56. Yes the deflationists such a K. denninger and M. shedlock do no seem to get this very simple point.
    To my mind this is a full on , in your face energy crisis – to increase the money supply and increase real capital spend the CBs should provide base money with little or no interest and instruct power companies to build non fossil fuel capital intensive power plants.
    Unfortunately utility companies have increased their profits via reduced capital spend at the cost of the collective wealth.
    This is a disaster – economics has not recognized capital depletion on its books – Monetarism masked the problem for years via increased private debt accumulation until implosion.
    Wages , food costs etc are merely a symptom of malfunctioning capital markets where any long term investment is gamed out of existence.

  57. Your BEST piece yet, Mr Roche…

    I am completely indebted to your brilliant logic!

    It is why I come hear daily…

  58. “World Bank: Global food prices are rising to dangerous levels”

    “Sysco declares force majeure, raises grocery prices”

    “The J. M. Smucker Company Announces Coffee Price Increases”

    “Kraft warns on price increases”

    “Kellogg says it will raise prices”

    “Sara Lee to raise prices again on higher commodity costs”

    “Bridgestone To Raise Prices”

    “Goodyear will raise tire prices up to 6%”

    “Allstate rates rise; patience with execs runs thin”

    “State Farm wants 28 percent rate increase in Fla.”

    “Blue Shield to delay Calif. health rate hikes [for only 60 days]”

    “Wellmark [Midwest division of Blue Cross] Rate Hike Approved”

    “Abercrombie & Fitch CEO says retailer will have to raise prices”

    “Sprint bumps up its smart-phone data plans $10 a month”

    “Xcel Energy customers to see rate hikes”

    electricity, mobile phone, insurance”…

    “Overall inflation is still quite low and longer-term inflation expectations have remained stable.” — Ben Bernanke, February 9, 2011″

  59. I’m sorry, but this is bullshit. Safeway and Walmart are reporting modest food inflation at best. In fact, Safewat CUT prices 3.4% in Q4 when this supposed food inflation scare was getting out of control. Via JP Morgan:

    Safeway is once again on the price investment cycle, taking prices down 3.4% from November to January 2011. Specifically, the grocer’s average price came in at $3.71 and total basket at $114.90, vs. $3.84 and $118.90, respectively, in our last study. As previously mentioned, Safeway and Wal-Mart were the only 2 retailers in our study to lower prices in 3 out of the 4 categories we track. To this point, the grocer delivered a slight 0.1% decrease in produce prices, a 3.3% reduction in meat, and a 0.2% drop in grocery prices.

  60. We have heard “deflation shock” so many times since last August. Well $CCI has been deflated to pass all time high and continue to be “deflated”. If gas=4/gallon is deflation shock, I can’t help wonder what the hell is inflation shock going to look like.
    Can’t believe someone still took deflation thesis serious. It has been completely discredited. By markets. If anyone still has faith in deflation, go ahead try hoard cash and long treasury, see who is going to be one of biggest losers in this scheme.

  61. And this is from WFMI’s (high end food retail) latest conference call (also little to no food inflation):

    A 2% increase in basket size was driven primarily by customers putting more items in their baskets, while there was a lot of discussion about inflationary pressures on product costs, our average price per item showed only a slight increase year-over-year. This is a reversal from the slight decreases we had been seeing.

  62. Any reader knows that I am not and have not been predicting deflation. But this fear of hyperinflation in the USA or even high inflation is overblown….

  63. Cullen,

    I agree that we are in a situation that is much more similar to that of Japan rather than Zimbabwe or that we are even on that path for that matter.

    But…would it not make sense to say that with pay raises almost non existent and workers being hired as temporaries rather than full timers that incomes for 90 whatever percent of the country are largely slipping from the relatively unchanged consumer basket. I totally understand the electronics that we buy today are far better value than what I could by for the same price 5 yrs ago but on the otherhand I know no BBY that would sell me a brick cell phone either. The iPhone is surely a great value but as incomes for the vast majority slip and prices hold their ground it seems logical that that would feel inflationary to the masses no?

  64. D,

    This is the bigger problem today. Inflation as a whole is relatively benign. But we’re talking about a country with 9%+ unemployment and some pretty severe inequality in terms of incomes. So, while inflation in food and energy isn’t hurting MOST Americans it is really hurting a fairly large segment. And its just flat out crunching the middle class balance sheet. So, it’s not fair of me to say that inflation isn’t hurting anyone, but on the whole it is a smaller problem than a lot of people would have you think. Inflation just isn’t a broad problem in the USA right now. That doesn’t mean it doesn’t exist, but I am trying to keep things in the proper perspective.

    In terms of tech specifically – I know you can buy a go phone at Best Buy where the phone comes with an Android operating system and a starting $25 plan. The phone is free! That’s no brick. That’s just an incredible deal. That’s what happens when you have companies like Google and others innovating great products. That’s the result of productivity. Who can’t afford $25 in the US anymore? This would be unheard of 30 years ago…$25 for internet, texting and phone….Amazing times we live in….I know a lot of other things are more expensive, but on the whole we are becoming infinitely more productive and we’re benefiting from it by seeing prices deflate in many products….

  65. confusing. it seems that we have all reached a common consensus that food price, commodities prices and the like are raising. but these factors are not included in the inflation index, because they are subjected to the seasonal supply shock like bad weather or political unrest. ..etc.

    but what about inflation expectation? is it as important or maybe more important than the actual inflation data?

    it is not either inflation, or deflation or the looming hyperinflation. there is such thing as StagFlation.

  66. stagflation involves high inflation….We’re not there….yet. Though oil has the very real potential of pushing through and then causing an economic disaster that ends in deflation….

  67. Its not bull Cullen. You should look closer at safway.

    Safeway have had to eat some of that cost to keep sales volume up.
    They Safeway may have to continue eating higher costs to hold demand steady — either that, or consumers will find a new source of pain as inflation hits their already weak earnings. They have so far absorb inflation but its there and “the company believes that by 2011, wages will start to increase again and it will be able to pass any further cost increases on to consumers, without endangering demand”.

  68. Cullen

    There is inflation but I agree that it could change and fast because we are on a life support kind of economic period.

    Call it artificial every thing including huge deficit spending. If and when it slows down significantly or stop its game over with inflation. We would see negative deflation.

    However if the world leaders (Human nature) operates as they always have since the beginning of times they will avoid the pain and print us in to La-La land.
    Cut the deficit spending in half and the GDP will collapse the credit economy.

    There is no magic bullet a debit need to be paid by the debtor or the creditors will have to take there losses or in our ethical world pass them on to others including the FED, or keep them in there books at price that do not reflect reality. The artificial economy allows them to recapitalizes and show financial profits and gradually they all start to take write off on bad debts as we see now on credit card etc.

    At the end of the day this is not magic it will needs to be paid ether by inflation “more deficit spending” or I hope reality but pragmatically speeching not very likely.

  69. I don’t deny that there is inflation. But we do not have high inflation by any means….Is it higher in some places than others? Yes. But overall it is very benign by historical standards. We are nowhere close to experiencing what is occurring in much of the rest of the world….

  70. That is obviously correct. The million dollar question is what is coming.

    To me this is still the Greenspan legacy era of perpetual-boom fantasy.

    “Three decade of bailouts from the S&Ls to continental illious, to the post 87 crash Greenspan injection, to the Mexican peso to the Long-Term Capital Management etc… It was irresponsible and misleading and was not compatible with a Free market economy. A Free market system is not a system of guaranties profit, its a system of profit and loss. If you can’t play don’t contaminate other players. Reorganize, restructure and get back in the game as an efficient player and don’t expect to be bailout.

    “We’re just in a never-ending series of short runs”.

    Ar first recession was inevitable and necessary to allow the masses of malinvestments to restructure but unfortunately the markets have not been allowed to react. This is why the longer this goes on the bigger the eventual reaction will be.

  71. cullen,

    my post never said a word about the government lying or a conspiracy theory.

    as an aside, personally, i think that government inflation numbers are somewhat low and have been for maybe 20 years or so, but i don’t think inflation numbers are way off either. nevertheless, we should all recognize that the government does have some MINOR incentive to want to keep the cpi low–inflation indexed social security payments, government pension payments, and TIPS liabilities, among other things.

    i do take issue, though, with posting the government’s granular numbers to show “proof” that their numbers make sense. my point is that “yes”. their numbers make sense in that they all mathematically add up. however, “no” they don’t make sense because that healthcare insurance number you show is laughable and obviously incorrect (btw, i have no idea whether the incorrectness derives from a math error, outright lie, conspiracy, incompetence on the part of the bureaucrats who assemble the number, bizarre seasonal adjustment, typo by the bls or by you, or possibly even innocent mis-reading by you).

    as an investor and as a citizen, i do have an interest in the deflation/inflation debate/conundrum. my recent personal experience suggests that most of the rest of the table you show is in the ball park (although i also question the stat on mobile phone inflation–i find it hard to believe that that has gone down in price–however, i would reasonably guess that the deflation might be explained by the added functionality in internet access, texting, etc. more than offsetting the increase in monthly service fees.) we should look at the components of cpi, but if one of the components is non-sense, we should question the nonsense, not defend it. if i had been in your position, i would have excluded that number from the table altogether–or even better, included it and noted that i seriously questioned the correctness and/or accuracy of that number. by publishing a number that so clearly looks incorrect, you injure your own credibility as much, or perhaps moreso, than the bls’ injures its own credibility by publishing such a ridiculous number in the first place. you should be pushing them to explain how they got to such a goofy number rather than defending their number.