What? Inflation?
Okay, so here's the "Official" explanation: the selloff over the past few days is courtesy of this new-fangled discovery called INFLATION. That's why rates have ticked higher.
You see, we have been living in a benign non-inflationary environment, and just yesterday, it seems that some traders have discovered that -- WTF?! -- prices of goods and services are rising.
Of course, many pundits, traders and investors -- and a goodly part of the Federal Reserve -- have convinced themselves that there really wasn't any inflation, so long as we wear blinders and ignore those pesky goods and services like Food and Energy. You know, those annoying items utterly necessary for survival.
That's been the f@#ktard explanation, anyway. If you believe it, though, you must be living in a cave -- which given the market for bat guano and stalagtites, probably has achieved the elusive Fed goal of price stability.
Bill King notes that:
For April 2007, the monthly food cost is $1044.80 for average family of four, per the USDA.
For April 2006, the monthly food cost is $995.40 for average family of four. Ergo y/y food inflation is 4.963% according to the USDA.
The BLS has ‘food’ inflation (urban) at only 3.7% y/y (unadjusted) for April 2007. Ergo, there is a 34% discrepancy in food inflation reporting between US Government Agencies – the USDA and BLS.
This story from May 24, 2007 went largely unnoticed: Reuters reports, “The Federal Reserve's adherence to core inflation, which strips out food and energy prices, is taxing the public's patience and risks credibility, a senior U.S. central banker said on Thursday.
‘In the United States over the last 20 years, core measures excluding food and energy did take out a lot of noise. But in the last three years it has been extracting quite a bit of signal,’ said Harvey Rosenblum, head of research at the Federal Reserve Bank of Dallas.” ( emphasis added)
Meanwhile, the rest of the world continues to raise their interest rates to fight inflation.
~~~
The Chicago Sun-Times was kind enough to include this table of food price increases:
Here's a sampling of where food prices are heading across the nation:
| National average prices | April 2007 | April 2002 | April 1997 |
| White bread (pound) | $1.20 | $1.00 | $.86 |
| Ground beef (pound) | $2.25 | $1.78 | $1.38 |
| Bacon (pound) | $3.50 | $3.26 | $2.66 |
| Whole chicken (pound) | $1.12 | $1.11 | $1.00 |
| Eggs (dozen) | $1.62 | $1.05 | $1.08 |
| Milk (gallon) | $3.14 | $2.78 | $2.61 |
| Butter (pound) | $2.86 | $3.20 | $2.18 |
| Ice cream (half gallon) | $3.79 | $3.72 | $2.90 |
| Red delicious apples (pound) | $1.10 | $.91 | $.90 |
| Bananas (pound) | $.52 | $.50 | $.52 |
| Navel oranges (pound) | $1.24 | $.75 | $.60 |
| Iceberg lettuce (pound) | $.99 | $1.15 | $.67 |
| Tomatoes (pound) | $1.63 | $1.32 | $1.35 |
| Frozen orange juice (12 oz.) | $2.52 | $1.89 | $1.73 |
| Sugar (pound) | $.51 | $.44 | $.44 |
| Peanut butter (pound) | $1.75 | $1.98 | $1.81 |
| Coffee, ground roast (pound) | $3.44 | $2.98 | $3.89 |
| Potato chips (16 oz.) | $3.48 | $3.29 | $3.18 |
Source: U.S. Department of Labor, Bureau of Labor Statistics
Blame your bill on corn, weather
JANET RAUSA FULLER
Chicago Sun-Times, June 6, 2007
http://www.suntimes.com/news/metro/415495,CST-NWS-food06.article
Labor Costs Get Hard to Control
MARK WHITEHOUSE
WSJ, June 7, 2007; Page A2
http://online.wsj.com/article/SB118113247728126353.html
Core inflation testing Fed credibility -Dallas Fed
Alister Bull
Reuters, Thu May 24, 2007 5:29PM EDT
http://www.reuters.com/article/bondsNews/idUSN2439399520070524
Years of Global Growth Raise Inflation Worries
MARCUS WALKER, GREG IP, and ANDREW BATSON
WSJ, June 6, 2007; Page A1
http://online.wsj.com/article/SB118109624836326011.html
Bernanke's Sense for Now: Hands Off
GREG IP
WSJ, June 6, 2007; Page A2
http://online.wsj.com/article/SB118104580628924969.html
Thursday, June 07, 2007 | 06:46 AM | Permalink
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» Inflation and the Fed from Quantitative Contemplations
I agree with Barry regarding the many pundits, traders, and investors that have convinced themselves that there really wasn't a reason to worry about inflation (just look at the stock market action of the past few months), but I disagree that many Fede... [Read More]
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Tracked on Jun 9, 2007 2:13:09 PM
Comments
"Inflation is the cruelest tax of all" (quote yet do not have source) that impacts those with less income in a manner greater than those with great incomes. I too am growing tired of the constant droning from government officials that is in fact intellectually dishonest especially with inflation.
Some examples -
1 - Inflation reality vrs inflation reported when food and energy is included.
2 - Unemployment including structural unemployed, those left workforce on a permanent basis and the uncounted illegal workers that are not longer working. (Illegal worker comment supported by Latin American remittance that are weakening - less employment less remittance back home)is greater when the definition is expanded.
3 - GDP Estimate by current White House Team "Still strong, rebounding and estimated growth rates of 2006 for each of the remaining quarters. Really...I guess the LEI are telling that story? Hummm....cough, cough...
4 - Housing and the REVERSE wealth effect will not impact consumer spending. Humm...Seems to me the argument was made the other way when home prices surged.
So, I put all this together with the Food prices and all of this validates that one must think for themselves as well as read the core data without the spin cycle.
Posted by: Jrs | Jun 7, 2007 8:25:32 AM
Barry,
Add to this the 'smoke and mirrors' act of General Mills. Yesterday, according to the AP, "General Mills spokesman Tom Forsythe said customers should actually see lower prices per box, but the boxes will be smaller, so the effect is a price increase of a few percent...Forsythe said General Mills cereals often appeared more expensive on the shelf because of their larger box sizes, and the switch to smaller boxes will make them appear more competitive, even with the increased price per ounce."(http://biz.yahoo.com/ap/070605/cereal_prices.html?.v=3)
Forsythe also said this should help retailers sell General Mills products "at prices we know consumers want."
Honestly, my mind 'numbed up' as I read this. Is it a joke? Can someone really think this way? Is this something like "...you know that 2 cups we sold you for "x" amount? Well, we're going to now give you a whole lot less at the same price, but it's going to look like more... and by the way, you're going to be really happy about it".
Posted by: Strasser | Jun 7, 2007 8:30:15 AM
The egg bubble is being driven by speculative omelet demand.
Posted by: Winston Munn | Jun 7, 2007 8:32:00 AM
my thought walking past the sun-times box yesterday was, "Barry's gonna love that". I need to make more real friends...
Posted by: j d ess | Jun 7, 2007 8:38:05 AM
Beware the echo chambers. A thousand voices a thousand times trying to ward off cognitive dissonance......Also geopolitical risk is at a screaming high after a year long build yet it is totally ignored. For a potentially high impact event with a high probability of occurence.....ugh. If Barry is interested I'll spellit out. I seem to be blocked most of the time.
Posted by: zell | Jun 7, 2007 8:54:18 AM
There's no inflation as long as you have whole chicken and lettuce for the main dish and banana/peanut butter for dessert. Every day.
Posted by: mhm | Jun 7, 2007 8:55:36 AM
Not blocked this time!! I'm talking about a 6-8 week time frame so I feel it a responsibility to give warning. Retired in North Florida. Time to go load up and make my Meals on Wheels deliveries. Go Gators!!
Posted by: zell | Jun 7, 2007 9:02:59 AM
I agree with your main point, but this bit you quoted is simply misleading:
Ergo, there is a 34% discrepancy in food inflation reporting between US Government Agencies – the USDA and BLS.
This kind of pseudomath always irks me.
It costs 4.963% more than it did a year ago to by food according to the USDA. That's 104.963% of last year's price. The BLS reported that it costs 3.7% more. That's 103.7% of last year's price.
When you keep the 100% of last year's costs in the calcualtion, the discrepancy, if you insist on taking a percentage of a percentage -- a sure sign that your analysis is flawed -- is (104.963 - 103.7)/103.7 = 1.21%
I'd argue that the best measure of the discrepancy is simply the difference: 104.963 - 103.7 = 1.263%
But I suppose that doesn't make as good copy.
Posted by: Ken Dyck | Jun 7, 2007 9:03:20 AM
Actually if you look at the data over the last few decades the BLS has a strong case for seperating F&E from Core. The former is very 'noisey' around the underlying trend and even back during the oil crisis was more noise than signal. Rosenblum's (Dallas Fed) comment is very astute - that is, for various reasons F&E are part of core now. We should ask why, how long and will it continue or is it a longer-than-normal abberation.
Posted by: dblwyo | Jun 7, 2007 9:08:43 AM
The difference between what the BLS & USDA report is because they are measuring similar,
but different baskets.
The biggest difference is that USDA is measuring a basket for a poor family while
BLS has a basket for a middle class family.
It just reflect the point that there is no one inflation rate. Everyone experiences a different inflation rates based on what they consume and official measures are just reasonable approximations for broad averages.
Posted by: spencer | Jun 7, 2007 9:21:33 AM
the balancing act between cutting the rates to stimulate and rasing rates to fight inflation continues. More people are pushing for rate cuts due to some faltering in the consumer, but the rates cannot be cut because of potential dollar damage, ergo, inflation argument wins for this week.
Posted by: Neal | Jun 7, 2007 9:27:41 AM
Silly rabbits.......institutions had to swing from long to short hence the "revelation" that inflation suddenly matters. It matters only when it matters to institutional $$$$.
THere have been subtle clues as to big money's change of sentiment. It's not going to be screamed out at you..
Ciao
MS
Posted by: michael shumacher | Jun 7, 2007 9:30:13 AM
But but, gas is cheaper than 1971 and you can buy another new computer for $400 (or an IPhone for $600.
And look how much homeowners insurance has gone down, especially in Florida.
Posted by: me | Jun 7, 2007 9:35:02 AM
The ONLY inflation that matters to those in power is if workers' wages increase. Then, inflation's a crisis and must be driven back.
Posted by: Sue | Jun 7, 2007 9:40:38 AM
BR - you forgot to mention the wage increase over the same time period. I am making two times more than what I was making in 1998.
Posted by: ManhattanGiuy | Jun 7, 2007 9:44:40 AM
Nice little juice of the SPY there with the printed money in hand...took all of 4 minutes from the close of the "auction"....
Getting desperate with the money drops now....
Ciao
MS
Posted by: michael shumacher | Jun 7, 2007 9:48:12 AM
Of course, many pundits, traders and investors -- and a goodly part of the Federal Reserve -- have convinced themselves that there really wasn't any inflation, ...
I know I've said it before on this site, but I'll say it again: I worked at a Federal Reserve District Bank in 2004-05 as an economic research analyst - assisting the economists with their research.
There was much discussion regarding the measurement error of "core" CPI beginning in early 2005. That's about the time the Cleveland Fed came out with their median CPI measure, and the Dallas Fed - whose head of research is mentioned in the above post - created their trimmed mean PCE measure. Furthermore, the FOMC minutes have stated for some time that the main concern of the Fed is that inflation will fail to moderate as expected (i.e. inflation - by whatever measure they're now using - is above their comfort zone).
I'm not sure what evidence suggests that a good part of the Federal Reserve have convinced themselves that there is no inflation. One could argue that - given inflation data - the Fed should raise rates, but this is what is discussed/argued in FOMC meetings.
Posted by: bodanker | Jun 7, 2007 9:48:33 AM
No kidding MS,
look at the spread between the SPY and the SPX
The Juice IS ON!!
Posted by: MarkTX | Jun 7, 2007 10:03:00 AM
They recently used the smaller box trick on the pasta I buy. They switched from 16oz boxes to 14.5oz boxes without changing the price at all. I'm not even sure if the grocery store noticed - they charge the same price for the boxes at the back that are still 16oz (until they run out). I'll have to look more carefully at the price markings to see if they still say 16oz on the tag below the shelf.
I'm definitely much more upset about shrinking the boxes than I am about raising the prices. They've raised prices on this pasta about 2-3 times in the past year and I never cared. But when they shrunk the boxes I looked at all the other brands to see what I could switch to. I hate it when companies do deceptive things like shrinking their boxes without making it obvious.
Cereal has recently gone up in price significantly. The way I buy cereal is I go through the whole aisle and see what's available for $2/pound or less. When I started doing this in 1998, it was about 80% of the cereal. A year ago it was everything that was on sale and a few other things. Now the cereal that is on sale is frequently over $3/pound.
Posted by: jkw | Jun 7, 2007 10:23:39 AM
Sue, that's so true, ain't it?
Zell, what event can you spell out for us? Hurricanes? Iran? Or a hurricane veering towards Iran?
Posted by: wunsacon | Jun 7, 2007 10:27:26 AM
A monthly food budget of $1K wouldn't be for a poor household. At 15% of expenses, that would translate into a household income of $6500, or $78K/yr. If you go by median household income of $46K, food would make up 26% of the budget, which seems a little excessive.
Posted by: M.Z. Forrest | Jun 7, 2007 10:43:17 AM
Where the hell is milk that expensive? I'm paying less than 2002 prices locally.
Posted by: Chad | Jun 7, 2007 10:56:10 AM
Helping to exaggerate the downward move in bond prices is big selling from mortgage guys who are readjusting their duration levels as prepayment risks start to go down as rates go up. The slower prepayments extends their avg maturities and they need to sell longer end bonds to get their duration back in line. The reverse occurs when bond yields go down which raises prepayment risk, reduces mortgage durations and mortgage guys need to buy bonds to extend them again. Thus this process causes buying on bond strength and selling on weakness exaggerating the moves in either direction.
Posted by: Peter Boockvar | Jun 7, 2007 10:56:15 AM
This inflation thing is sneaky.
Has anyone here received their new property assessment? I got mine Monday and the assessor says my property went up 80% in four years. Guess what will happen to my taxes?
And yours, and those subprime borrowers hanging by a hair.....
Taxes would be inflation, no?
Add gas, energy, food, taxes, shelter. What price is the FOMC looking at? They appear to exclude life.
Why are folks like Warren Buffett buying big now? INFLATION.
They can (could) buy inflating assets at bargain rates. Note how that TYT puts the brakes on the M&A action and the general markets?
Posted by: Craig | Jun 7, 2007 11:03:38 AM
I've been amazed for years now that anyone would buy a T-Bill at 5%.
Oh sure the real return is 2.5% if you are silly enough to believe core CPI or core PCE matters, but when you factor in total inflation the real return is about half that. That ain't gonna fund my retirement.
So I've been heavy on the international side and with the dollar in the tank, that's been a great play at least to now.
So a question for BR that is really no longer just academic.
Over the mid to long term, does the Fed target total inflation or core? If core why, when the two have been decoupled for the better part of 5 years.
Posted by: Michael Donnelly | Jun 7, 2007 11:11:39 AM
