Inflation Confined to Rest-of-the-World, Avoiding U.S.
The United States has this fascinating relationship with inflation -- there is this school of thought that if we disrespect it, belittle it, then perhaps it will go away.
That is not, unfortunately, the case in the real world. I guess the thought process is that if we collectively pretend there is no inflation, the Fed won't have to raise rates.
Let's look at last week's PPI as an example. We saw a hefty increase in component prices in March. There was a big 4.1% rise in energy, with gasoline up +8.7%. Food "only" saw a 1.7% rise in prices. If we ignore these two life necessities (Inflation ex-inflation), the core was unchanged. A 1.2% decline in light motor truck prices mitigated the increases everywhere else.
Here's the good news: if you forego consuming food and energy, and stick to buying light trucks, you have no inflation worries.
Elsewhere in the world, where real data matters and rhetorial games are not a substitute for real economic analysis, they do have inflation worries. The UK's version of inflation (CPI is out Tuesday in the US), showed sharp price rises:
"The Office for National Statistics said output prices rose 0.6% on the month in March to stand 2.7% higher than a year earlier, up sharply from 2.2% the month before, a figure analysts had expected to be repeated this time.
The figure spooked financial markets and the pound rose to its highest in three months against the dollar of above $1.991. Markets broadly expect Bank of England's monetary policy committee to raise interest rates again next month, taking them to 5.5%.
Analysts said the figures suggested firms were managing to put up their prices in the wake of a year of steep rises in energy costs. Core output price inflation, which excludes volatile food and energy prices, also picked up more than expected to an annual 2.9%, the fastest rate of growth since June 2006."
Note that Core Inflation prices are almost an afterthought, not the main focus of the inflation report.
We noted earlier in the year that The Office for National Statistics allows consumers to calcualte their own personal inflation rate, based on a variety of factors. I'd love to see the BLS try that trick . . .
>
UPDATE: April18, 2007 10:25am
Bill King sardonically asks:
“Explain to me how the country with the stronger currency and higher unemployment and less wage inflation - the U.K. – had the inflation rate for March accelerate to +3.1% (that's the most rapid rise in 10 years) and at the same time our purported inflation rate dropped (and don’t even get me started on the components) ?????!!!!!!!”
>
Source:
Factory prices fuel inflation fears
Ashley Seager
Guardian Unlimited, Monday April 16, 2007
http://business.guardian.co.uk/story/0,,2058237,00.html
Monday, April 16, 2007 | 06:52 AM | Permalink
| Comments (48)
| TrackBack (0)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef00d8341d4b3453ef
Listed below are links to weblogs that reference Inflation Confined to Rest-of-the-World, Avoiding U.S.:
Comments
The reason for excluding out energy and food is that they are both very volatile components of CPI. When first constructed, large increases one month were often followed by large decreases the following month. At the end of the day, the average change was expected to be no different than the core inflation rate. However, in recent years, food and energy inflation has consistently exceeded core inflation but people still treat this component as if it has no real influence on the price inflation that people experience everyday. Focusing strictly on core inflation is somewhat delusional but many now miss the point. This has become just another example of the pro-forma view now applied to the economy similar to how pro-forma financial statements were a big thing in the late 1990's, early 2000's as people tried to justify the lofty valuations placed on many companies.
Posted by: W.Edwards | Apr 16, 2007 8:20:39 AM
Of course, UK CPI is itself a modified inflation measure that does not capture the real cost of living. Harmonized CPI carries a housing + utilities weight of just 10%- remarkable in a country where the median house price is moe than 5 times the median household income. This measure shows inflation at 2.8%.
The retail price index, the broadest measure of inflation, carries a housing weight of 30%. This measure shows inflation at 4.6%.
Guess which one the Bank of England targets?
Similarly, the Bank of Japan targets inflation excluding fresh food prices.
The Bank of Canada targets core CPI.
The Riksbank in Sweden targets UNDX, "underlying" (e.g., core) inflation.
So does the Norgesbank.
So while I would concur that targeting inflation minus eveything that goes up is a mug's game, the Fed is far, far away from being the only central banks that plays this game.
Posted by: Macro Man | Apr 16, 2007 8:23:02 AM
Macro Man,
Point well made. Addionally, a big problem with the price indices is the way they handle housing. At least the food and energy costs are out there for all to see even if they publish the core measures. At the least, it makes indices hard to comapre across countries. But more and more are following the US model of imputed rent.
Posted by: js | Apr 16, 2007 9:18:19 AM
what would the retail sales numbers look like this morning if we excluded food and energy?
Posted by: dave | Apr 16, 2007 9:27:23 AM
Why do economists "exclude" food and energy prices due to volatility? Why not put a small MA filter, or some other mathematical mechanism, to incorporate them. I'm an engineer and if I ignored "volatile" dynamics, i'd be fired. But instead, i filter them so I'm not too disturbed by those dynamics unless they show a longer-term trend. Exclusion of these volatile food/energy prices is irresponsible. Incorporating them somehow to account for their volatility is the right thing to do. Does anyone already do that?
Posted by: Joe | Apr 16, 2007 9:27:56 AM
It is better to measure the construction costs (material) than the finalized house price tag. Thus speculation and other localized problems are left out.
Food prices can be seasonally adjusted but I guess that's too much work.
Posted by: mhm | Apr 16, 2007 9:33:34 AM
Exactly, Joe. A simple solution!
Political dishonesty has seeped into everyplace now; it creates huge long-term problems because nobody now knows what is happening.
Posted by: wally | Apr 16, 2007 9:36:04 AM
Speaking of dishonesty how does everyone like all the upgrades out this morning in the abscence of a monday morning M&A story.
"let's upgrade the entire market before the meat of earnings season begins".......and if you actually said that in any brokerage house, as an employee, you'd have been shown the door.
Criminal
Ciao
MS
Posted by: michael schumacher | Apr 16, 2007 9:40:28 AM
What exactly is "criminal" about it?
Posted by: Macro Man | Apr 16, 2007 9:50:25 AM
Nice post and useful comments. Thank you!
Posted by: Frank de Libero | Apr 16, 2007 9:52:46 AM
Macro-
apparently you have not been reading anything that is posted here by BR.
Criminal in it's timing....why not last week?....week before?........no big M&A story so the market needs a little help right before earnings season.
Show me.....how the market deserves to be upgraded so liberally BEFORE we really know what the 1st qtr earnings are. We pretty much have the , fake, inflation #'s so we know that PPI is still rising ergo CPI should rise as well....but let's just pump up the already overvalued market a bit more.
Never mind.,.. I suppose if you think the jobs #'s are real nothing I can post will sway you from your right to be "right".
Posted by: michael schumacher | Apr 16, 2007 10:02:07 AM
Big swoons in California tax receipts. Inquiring minds would like to know how the Ministry of Truth can pull 0.8% retail sales numbers out of their hats?
http://wallstreetexaminer.com/bl...s/winter/? p=655
Posted by: Russ Winter | Apr 16, 2007 10:06:01 AM
It is investment advice. You can choose to follow it. You can choose to ignore it. Just because you disagree with it does not make it criminal.
If you feel so strongly that the game is rigged and populated by criminals, why play?
Posted by: Macro Man | Apr 16, 2007 10:06:22 AM
If bad data hit the market and the market ignores it, was there bad data? At what point does any of this stuff matter? I know thats the trillion dollar question, but i have religously read this board, calculated risk and Roubini since July, many of the things they have written about are happening and appear to be the facts....but the general markets don't care...
What is a smart investor to do with this bearish information, just be aware of it until it matters? Seems to me, in this market ignorance is bliss...
(i really hope my exasperation is THE top)
Posted by: William | Apr 16, 2007 10:10:19 AM
don't confuse what I post here with a trading style......this is a blog where people post idea's to foster understanding....not trading idea's..and yes I do think there is a serious agenda when stocks get upgraded before earnings are out.....does'nt mean I'm not profitting from it. Just making an observation and reading between the lines...something that more people should do.
Ciao
MS
Posted by: michael schumacher | Apr 16, 2007 10:11:27 AM
THere is a big difference between "investment advice" and pumping. Pumping a stock Like say AMZN this morning, by Deutche Bank, they say buy it because profit margins "might" improve later this year or next....no color, no reason, just someone pumping a low float (at least ownership-wise) at it's 52 week high before earnigs are out. I can site dozens of examples just this morning alone.
You don't see a problem with upgrading just to do so with no reason?
If you want to just call it "investment advice" than that's you're take on it...however I think you are smarter than that and realize it as well.
Ciao
MS
Posted by: michael schumacher | Apr 16, 2007 10:17:51 AM
My observation (which may well be incorrect) is that you seem awfully cavalier about calling anyone who is not bearish crooked/corrupt/myopic/stupid.
Global economic growth is strong. Global monetary conditions are not tight. Global markets are doing well. US markets are underperforming, just as the US economy is growing below trend. It is entirely reasonable for someone to conclude that a broadly constructive global environment supercedes US domestic worries, particularly when US multinational companies are well positioned to benefit from this.
Posted by: Macro Man | Apr 16, 2007 10:19:49 AM
How is this different from employment statistics? In the US we count half the unemployed and then brag about how our unemployment is half of Europe.
My first graduate econ course the prof said the US has the worst economic statistics in the world. Seems he was correct.
Posted by: me | Apr 16, 2007 10:25:44 AM
I'm not disagreeing with you, as you obviously think I am. There is a large disconnect between reality (data-questionable at that) and valuations.
As far as your "observation" that's just it...YOUR observation...just like it's my observation that the entire market gets an upgrade before earnings are out is questionable in my book.
You disagree but you offer up no real reason as to why just the same rhetoric that the perma bulls use..." it's up because....it's up".....no skill in that.
Ciao
MS
Posted by: michael schumacher | Apr 16, 2007 10:31:54 AM
Doesn't the apparent disconnect between the headline and core inflation have something to do with relatively stagnant wage growth? In other words, if workers can't demand higher wages in response to the higher cost of basic necessities, then demand for discretionary items, as measured by the core rate, won't be as hot as it might otherwise be. Unlike in the past, the core rate doesn't necessarily have to follow food and energy higher. So the real question, I guess, is whether the slow growth in labor costs is disguising higher overall inflation or is it truly holding it down? I lean towards the latter.
Posted by: BSB | Apr 16, 2007 10:32:16 AM
In Germany, anyone who enrolls in a job training scheme is counted as employed. So it's easy to improve unemployment- pay people to enroll the scheme!
In the UK, the unemployment rate is either 2.9% or 5.5%, depending on which source you use.
In Japan, household spending is calculated from a survey filled out large by the wives of Ministry of Finance bureaucrats.
Less than ten years ago, China reported full year GDP on December 28. It was never revised.
While the US surely has its share of poor numbers, it is by no means alone...
Posted by: Macro Man | Apr 16, 2007 10:33:33 AM
as far as the underperforming part of your arguement. I find it hillarious that the rest of the world seems to be raising rates, Japan excepted, or at least thinking about it and we are still fixated on lowering them and then say that are market is underperforming. Relative to what???? the rest of the world?? Europe can't even take a shit unless it sees what we do first (the day before). We used to LEAD the world markets now we are taking our cue from europe, asia. et al... I see a large problem when we think we are insulated from inflation, as our FED acts as if we are, when the rest of the world seems to at least acknowledge it and take some steps to deal with it......we just pine for more rate cuts because we don't want to do the heavy-lifting required to get us off of cheap money.
So no...I don't think our markets are undervalued...quite the opposite since fundamentals will show that. But I also understand that those are not the only way to interpret economic conditions...as do others in a negative and positive way. It's all in the interpretation is'nt it??
Ciao
MS
Posted by: michael schumacher | Apr 16, 2007 10:40:49 AM
Blah blah blah - oil is way up (which I insist is out of the Fed's control), hence the numbers are up. Would raising rates to, say, 7% do anything to help stem inflation here? I really doubt it.
I'm curious to know what you guys feel would be appropriate action by the fed to target the price of a commodity of which we have no control over.
?
Posted by: Eddie | Apr 16, 2007 10:48:33 AM
Oil is out of the feds control...raising rates would'nt have ANY affect on it. There you feel better now???
Ciao
MS
Posted by: michael schumacher | Apr 16, 2007 10:52:23 AM
Anyone who remembers inflation-inspired 20+% interest rates in the early 1980's as well as several lesser spikes over the following decade, must have a very hard time understanding what the fuss is all about. I sure do. These, I believe, are the good times. Easy money, low inflation and nil geopolitical risk.
The damper on the party, for those of a more parochial outlook, would be the relative shrinking of the importance of U.S. markets (and econ stats) as the drivers of global investment decisions. A cleaning of the house with respect to the dollar might go some way to reversing that trend but as it stands, the word 'irrelevance' somehow keeps springing to mind.
Posted by: Charles Butler | Apr 16, 2007 10:53:52 AM
