Much Ado About Nothing
Everybody seems to be all abuzz about today's CPI number. Its no big whoop.
Why? At this point, I think we can all agree that a 1/4 point increase at the June FOMC meeting is a foregone conclusion. So that makes today's data more or less irrelevant to that meeting. Even if the inflation data comes in extremely benign, its but one point in a data series. Its doubtful it will impact the Fed's thinking about the next tightening in any meaningful way.
And the August FOMC meeting is so far away, and there will be so much additonal data between now and then, including 2 NFP reports, that today's CPI will have long been forgotten.
By August, the Fed will most likely be forced to acknowledge that either a) the economy has slowed enough that the tightening cycle is over; or 2) Inflation has gotten away from us and we need to keep tightening. By August, even Greenspan would have to admit that Goldilocks is dead . . .
Either way, today's data point, at least as far as the Fed is concerned, won't change very much.
On the other hand, a benign number -- or even one that hits consensus -- could light up the markets. The sentiment readings have all hit extremes, with the Put Call ratio, the Bull/Bear ratio, and the percentage of stocks above their 200 day moving average at levels typically associated with intermediate bottoms.
UPDATE June 14, 2006
Mike Darda adds:
The headline CPI rose 0.4% m/m in May while the core CPI rose 0.3% for the third consecutive month. The headline CPI is up 4.2% on a year-to-year basis while the core CPI is up 2.4% y/y. Three-month growth in the core CPI (annualized, not compounded) has risen to 3.7%, the fastest pace in a decade. Owners’ equivalent rents, which make up nearly one-third of the core CPI, advanced 0.6% m/m during May and 5.5% A.R. during the last three months, the fastest since 1990. On a year-to-year basis, rents are up 3.3%.
Nothing to see here folks, move along.
As Art Laffer said last night, there's no inflation here . . .
Wednesday, June 14, 2006 | 08:00 AM | Permalink
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Comments
Good appearance on Kudlow last night...you made that cheerleader Laffer look silly on the inflation question...his citing the lofw cost of PCs and low interest rates as evidence of no inflation against the rising costs of housing, health care, energy, taxes, insurance, education, etc. was laughable.
Posted by: Rich DeSio | Jun 14, 2006 8:49:08 AM
Is there anywhere to get an average put/call ratio and the bullish/bearish ratios? The site I used to use (vtoreport) appears to have closed down.
Posted by: Ryan | Jun 14, 2006 9:38:38 AM
Give credit when credit is due - this is Alan Greenspan's inflation
The FED IS NOT TIGHTENING !!!!
If it were, do you REALLY believe that commerial paper outstanding growth would be 18.4% for the last 52 weeks and Bank loans & Commmerical paper outstanding would NOT BE UP at a SAAR of 24.6% for the last 7 weeks, 15.7% for the last 13 weeks and 13.5% for the last 52 weeks
Posted by: Carl Pellegrini | Jun 14, 2006 9:47:32 AM
It is interesting that in 04' and 05', we saw double digit increases in insurance premiums, tuitions, housing prices, and utility bills daily in headline news. Now if you look at the stock price of xom, aet, dhi, and duk, it is clear that the price increases has moderated. So, is inflation getting worse, or has inflation come down from high levels?
Posted by: yc32 | Jun 14, 2006 9:59:42 AM
funny how economists are looking to ignore the rise in owner's rent.. typical bs
Posted by: vf | Jun 14, 2006 10:06:32 AM
Yes. Now that everyone can agree with Barry perhaps the worst is over and it is time for a relief rally. Or not. The Fed is trying to talk down inflation expectations, not actually lower inflation. Just ask that Lonesome Dove Bennie B.
Posted by: Ned | Jun 14, 2006 10:10:26 AM
all the angst. the markets finally turned negative (barely) for the year, before turning up this morning. gold is no longer up 40% for the year, just 10%. what a hoot. let's see how people respond to real losses when they come.
Posted by: scorpio | Jun 14, 2006 10:15:04 AM
What I don't understand is the items in the core CPI. They've been subject to two years or more of dramatically increased production costs yet they haven't passed those on while profits remain. It's almost as if the core components don't need insurance, energy, transportation, health services, etc.
Posted by: Robert Cote | Jun 14, 2006 10:34:14 AM
I'm a bit of a broken record here, but as we look to Q3 and Q4 it will all turn on housing. And the more BB tightens to fight infaltion, the harder housing lands (or crashes)
Posted by: edhopper | Jun 14, 2006 10:40:48 AM
4.2% YOY for the CPI?
I still think a 6% Fed Funds rate is in the cards.
Posted by: Franco | Jun 14, 2006 11:03:25 AM
"I still think a 6% Fed Funds rate is in the cards."
Me too. And a 50 basis point hike somewhere along the way to really show the market who is in control.
With inflation running at 4.2%, I think Bernanke has every right to get on top of this, pronto. And I think the media is WRONGFULLY giving him a bad rap for doing so.
I don't think the Fed can count on a slowing economy to handle inflation.
Everyone blames the Fed for "over tightening" in the past, but you have to look at the circumstances. Usually the markets were red hot when the Fed was tightening and in total denial that things were out of control. It isn't until the Fed brings things to their attention that they realize they are out of control and then panic ensues.
Posted by: me2200 | Jun 14, 2006 11:42:41 AM
interesting twists - gold and oil are down...CPI up -seesm that a lot of speculative capital is leaving the resource sector. CPI, of course, is a picture from the past. May be the FED is now in better control of the inflation and the tough talk by Ben impacted inflation expectations. What do you think, Barry?
Posted by: alex | Jun 14, 2006 12:22:32 PM
check that out: http://www.businessweek.com/investor/content/jun2006/pi20060614_127861.htm
Posted by: alex | Jun 14, 2006 12:27:30 PM
I believe that the fed will continue to tighten as long as core inflation is above their comfort zone. Many central banks have raised rates, except for the bank of England which has an exploding money supply, no doubt because they fear a downturn in housing if they raise rates.
Posted by: Gary Anderson | Jun 14, 2006 12:32:15 PM
anyone willing to venture a guess on how long the yield curve stays inverted?
Posted by: drey | Jun 14, 2006 12:52:39 PM
Flat/Inverted until the fall when the dollar cracks and the long end goes up.
Posted by: jab | Jun 14, 2006 1:10:51 PM
I think it is important to remember that the original stated fed goal to raise rates was to return the FED Funds target rate to nuetral, it was not to put a lid on inflation. Hence all the discussion about a possible pause in the rate hikes.
In other words many believe, both within the Fed and without, that around a 5.00- 5.50 targeted rate would be neither an expansive nor a constrictive policy.
Now however with inflation definitely a problem it seems to me reasonable that we anticipate another 200 - 300 bp rate hike in the making. And if I am right these hikes should come in 50 -100 bp increments instead of 25bp.
Anything less would be an abandonment of the fight to contain inflation.
Fighting inflation is like fighting a fire. You cannot smother it enough, nor leave any embers alive.
You heard it here first.
Posted by: ken | Jun 14, 2006 1:28:54 PM
And speakin of that inverted curve Banky stocks really feelin the whackage today. I bet their none to happy with Bennie.
Posted by: tjofpa | Jun 14, 2006 1:47:46 PM
All this discussion about 6% discount rate and CPI ''inflation'' makes me want to ask again the famous question:
* What do you think the ''real'' (after ''inflation'', whatever that means) discount rate now is like? More like negative, more close to zero, more like positive?
Put another and stronger way: if a financial company borrows at a wholesale rate linked to the discount rate, how easy is it to invest that money in assets that appreciate faster/return more than the nominal discount rate?
Posted by: Blissex | Jun 14, 2006 2:01:58 PM
Does anyone pay attention to the "Moore Inflation Predictor"? They are now forecasting the average annual rate of inflation (based off of CPI) to be 7% in December.
Posted by: Josh | Jun 14, 2006 2:07:00 PM
«I think it is important to remember that the original stated fed goal to raise rates was to return the FED Funds target rate to nuetral, it was not to put a lid on inflation.»
But what is a neutral rate? In recent years this seems to have become code for ''as close to zero in real terms as possible''...
Also note the slightly amusing translation of «goal to raise rates was to return the FED Funds target rate to nuetral» into plain english:
''Our current real rate is wildly expansionistic, so we shall undershoot the neutral rate for as long as we can while telling people we shall eventually reach it''.
Posted by: Blissex | Jun 14, 2006 2:07:42 PM
Its not the Fed Funds rate that has to be neutral. It is the inflation rate that has to be neutral and I think it needs to get down to 1.5-2%.
I think the market has a bad, bad case of denial. everyone is talking about one and done. I don't see it happening. I think oil has to get back south of $40 and commodities have to cool before the Fed is done.
The market has been saying one and done for a long time now. And they've been wrong. What is different now ? Nothing. If anything the situation is worse.
Like I said before... a few well placed 50 basis point hikes a year ago would have prevented a lot of pain.
Posted by: me2200 | Jun 14, 2006 2:32:23 PM
"The market has been saying one and done for a long time now. And they've been wrong. What is different now ? Nothing."
Au contraire. What is different now is that the housing sector is finally rolling over.
Posted by: Alaskan Pete | Jun 14, 2006 2:51:32 PM
"Au contraire. What is different now is that the housing sector is finally rolling over."
It isn't rolling over fast enough to affect demand or spending, not yet so far. Commodities are still high, consumer spending is still strong, house owners are still in denial, etc.
I agree it is rolling over, but it hasn't made it into anyone's macro numbers yet. Take the beige book, for example.
Posted by: me2200 | Jun 14, 2006 3:01:46 PM
Don't be so sure it isn't rolling over fast enough to affect spending. You see any retail stocks making new highs? More like new lows. Some down 30-40%. ALL DOWN substantially. x-gasoline retail sales were negative.
Contrary to popular opinion, price stability also includes things like..........................housing.................and as Pete mentioned.............
I see NARI and others blather about how we want our market to have a soft landing like Britain. I guess they know something I don't. I read last week that first time home buyers were at a 25 year low in Britain. I think Britain just as easily be characterized by teetering on the edge of the black abyss. That is why they aren't raising rates. Our Fed will soon follow. Bernanke doesn't need to pop any housing bubbles and if anyone has read his research they would know he firmly is against any attempts at popping perceived bubbles. Using the analogy of a sledge hammer, ie, rate increases, to make a cake or something as unattractive.
Posted by: B | Jun 14, 2006 3:17:43 PM
