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Inflation is Dead? Part II

Last week, we noted that Reports of the Death of Inflation Have Been Greatly Exaggerated. The greenback has been in freefall, and that means the prices we (Americans) pay for commodities just goes higher.

A few examples: Oil is at an all-time high, having broken through $83 last week. 2008 could be the year we see Crude hit triple digits. Gold is at a 28-year high, having broken through $735, with $800 a realistic possibility. Copper is soaring.

Agflation is very strong: Wheat recently made all-time highs, along with recent big moves in Orange Juice, Corn, and Soybeans. Dairy prices are out of control, up nearly 100% over 24 months.

Just last week, CNBC ran a segment titled, “Is Inflation Dead?” (It should have been titled "Is Journalism Dead?")

In light of all of these screaming prices, you know I have little faith in that BLS report of 0.1% decline in CPI. (Who are ya gonna believe, Us, or your lyin' eyes?)

Let's take a closer look at CPI:

BLS Table A.  Percent changes in CPI for All Urban Consumers (CPI-U)

>
The BLS has transportation costs down 1.2%.Look at the above BLS table under the ‘compound annual rate 3-mos ended Aug ‘07’ column. Transportation costs are down 6.6%; energy prices are down 17.5%.

The benign CPI is due to lower energy costs over the past three months. Of course, the record surge in energy prices this month negates this. The September energy prices should be up more than the above 3-month declines.  What do you want to bet that somehow this will be dismissed?

Yet every delivery comes with a fuel surcharge, and we are told ‘motor fuel’ costs are decreasing.

It appears that some of the public is no longer buying this nonsense. Here's the results of today's WSJ survey. When asked the question "Which is most likely to become a problem with the economy?," well over half -- 63% -- said either inflation or stagflation:

~~~

Now that the Fed has all but abandoned their mandate of price stability, I suspect we are going to be seeing much higher costs for all commodities, foodstuffs, energy , metals over the next 12 months . . .

Monday, September 24, 2007 | 07:45 AM | Permalink | Comments (65) | TrackBack (1)
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Comments

I try to judge inflation from my day to day life. Buying things such as groceries, dry cleaning, etc are clearly more expensive then before.

Posted by: Banker | Sep 24, 2007 7:48:57 AM

US dollar under W is LOWEST EVER !

http://graphics8.nytimes.com/images/2007/09/22/business/22charts.700.jpg

shows the dollar under George W. Bush is the lowest ever in floating era since 1971 ( which was the change from gold standard or Bretton Woods I )

I wholeheartedly agree with the 38% of people who said Stagflation.

Posted by: km4 | Sep 24, 2007 8:02:55 AM

"All items less food and energy"

Sigh!!

I'd be filthy rich if I could trade all securities, less downturns and corrections.

Can't these idiots use moving averages to smooth out the "volatility" of food and energy?

Francois

Posted by: Frankie | Sep 24, 2007 8:14:13 AM

Im not sure the fed totally abandoned price stability. I just think its clear that this new fed prioritizes a US economic slowdown AHEAD of inflation or pricing concerns.

Whether they are right is yet to be seen. But I just dont see how this fed will lower rates as aggressively as some are suggesting; in the low to mid 3's in target rate. I mean, is 4.75% fed target rate really that restrictive?

At some point, it just seems the fed will go back to a tightening bias and I think future tightening will be more aggressive than this current easing campaign that we may or may not be in.

Also, if eurozone economies start to slow as a result of too strong a currency, perhaps some cuts by ECB; although they are only now wondering whether to stay put or raise. I think they stay put for a while. How could they be that happy with such a strong currency possibly slowing their economies in years to come?

Posted by: UrbanDigs | Sep 24, 2007 8:19:14 AM

The Fed abandoned the price stability quest years ago. The drumbeat of 'inflation is out of our comfort zone' with no action to match the words went on fo a long, long time and was accompanied by slowly turning a blind eye toward item after item that got away from them. An honest accounting - including, for instance, real housing costs, would have alerted the Fed much earlier to bubble problems. Since sequential bubbles seem to be the curse of our era, a Fed that does not learn how to deal with them is not of much use.

Posted by: wally | Sep 24, 2007 8:32:59 AM

Anyone who has a brain, well, anyone who has to shop for themselves knows there's inflation in everything. I recall several years ago, Jimmie Rogers would be laughed at when he would say, 'Have you see the price of pepper lately?' Well, have you seen the price of eggs? Last week our Costco raised them 46%. oops, sorry, we x-out food.

Posted by: Strasser | Sep 24, 2007 8:36:06 AM

"Is journalism dead?" is a rhetorical question.

Posted by: Winston Munn | Sep 24, 2007 8:42:46 AM

With all my cards on the table, I'm a big fan of the BLS, I think they do the best they can to measure employment and inflation.

If manufactured goods and houses are falling in price and wages are weak, it is possible that inflation is coming down. (plus gas prices were way down in August)

So take for a second that the BLS has it right on average inflation is -0.1% and generally soft. That means the big lumpy things like cars and houses are down, but the little everyday stuff is up (food especially).

What would that mean for INFLATION EXPECTATIONS ?

I'd say it would be bad, real bad. Even if it is true that inflation is down and low, it's only because the house I buy every 10 years is down, the car I buy every 7 years is down and the dishwasher & dryer I buy every 5 years is down.

Those things do nothing for my expectations of inflation because they are so infrequent.

My inflationary world view is built by my every day experience, and that is up, up, up.

I'd say the Fed still has a problem.

Posted by: Michael Donnelly | Sep 24, 2007 8:49:18 AM

Urban-

i never bought the economic slowdown argument.

the fed knew that the second half of this year would be sluggish. they predicted this last year, largely due to housing. that's why they paused the rate hikes, b/c the slowing economy would have less inflationary pressure.

if they were really worried about growth, they would have been cutting then, not now.

also, where is the slowing economic data?

outside of the payroll report, everything is fine. the unemployment rate was 4.6%, gdp last quarter was over 3%, the NBER says no risk of recession, the manufacturing indexes are all up, the beige book showed moderate expansion, etc.

are they really afraid of slowing growth? or are they afraid credit contraction?

Posted by: m3 | Sep 24, 2007 9:08:14 AM

And where prices are not down I see smaller amounts in the boxes, or poorer quality.

Posted by: Old Ari | Sep 24, 2007 9:10:28 AM

I used to work for Nabisco foods 10 years ago. Even then the big move was "productivity" aka "how to make the products with cheaper ingredients and not have them be completely inedible". There is a reason chips ahoy cookies no longer taste very good.

At the time I decided I wouldn't be putting any of my 401K money into company stock. good decision.

Posted by: 12th percentile | Sep 24, 2007 9:43:17 AM

Real global growth has likely never been stronger. Billions of people are experiencing rising living standards and upgrading their diets. That's one reason why commodity prices are rising.

Another is supply shocks. We've created an entirely new demand for millions of bushels of corn that didn't exist 5 years ago in the form of ethanol. And severe droughts in Australia have reduced wheat inventories to historically low levels.

Inflation may be understated, but much of the price pressure in commodities is due to real global economic growth and restricted supplies. Equillibriums prices are adjusting higher and peforming their rationing function.

Posted by: Groty | Sep 24, 2007 9:45:53 AM

12th percentile, that is an excellent story. It is those kind of quality losses that the BLS does not even attempt to capture.

Can you give us any more detail ?

Posted by: Michael Donnelly | Sep 24, 2007 9:46:54 AM

Does inflation as pure numbers, adjusted as it is, measure our finances adequately anymore?

The quality/hedonic adjustments make sense, but Americans are addicted to ever-improving gadgets and crap. Cellphones, Internet access, cable TV and DVR are just one example.

Try to buy a car with manual windows...or a manual transmission?

Maybe it is better to come at it from the other side of the equation--the savings rate. That is the true measure of inflation of all sorts; the inflation of the cost of goods and the inflation of the American thirst for "more crap!"

Posted by: wnsrfr | Sep 24, 2007 9:52:15 AM

Falling US$ and Inflation. In another blinders-on, myopic "journalistic" piece on the Call-No-Bubble-Corp television (aka CNBC), econ guy, Liesman (I like his guitar playing) narrowly focused on 16% of the US economy which is imports of which a significant portion comes from Asian nations with official and defacto US$ pegs. Liesman's point was a falling US$ would have smaller impact on inflation than feared for the reasons he cited.

Of course he left out commodity prices which are set globally in US$. The disingenuous impression of 16% of imports as the only part of US economy at risk for inflationary effects of falling US$ effects leaves out the effect of all US domestic agriculture, energy and mineral production.

And, in addition, he left out the cost of foreign capital. Foreign investors own 33% of US corporate debt, they will need higher interest rates (inflationary) to convince them to accept the currency risk of a falling US$ debasing the value of debt they buy.

Shame on you Steve Liesman of Compliment-No-Bear-Corp television. Take the blinders off and go in for a brain realignment. Cheerleading as a production value at Cheerleaders National Broadcasting Company is nauseating.

Posted by: sanjosie | Sep 24, 2007 10:17:39 AM

Bought cheese over the weekend at the local grocer. Paid two bucks more for it than I was just a few years back. At this rate, I may be looking for the gubmint cheese soon.

Posted by: Florida | Sep 24, 2007 10:21:16 AM

My goodness. What has Bloomberg TV done? Everyone's head is so big now...and their cameras are so unflattering. Betty Liu just had a terrible interview with Jim Rogers. Oh, where is Suzy Assad when you need her. I long for the Bloomberg of old.

If only Michelle Makori was on all day.

Posted by: Global Savings Slut | Sep 24, 2007 10:21:42 AM

mb3,

I think they are afraid of slowing growth as a result of the credit contraction and all that goes with it; talk to Roubini about his insolvency concerns. That August jobs report is what gave the fed the opportunity to do what they did. Without that, I doubt they would have moved so aggressively. Knowing that fed action takes 8-12 months to funnel through economic system, I think this is a preventative move, which is somewhat rare for a fed to act on assumptions that a dynamic (credit squeeze) will as they say 'forestall adverse effects on broader economy'.

The aug jobs data made some think the fed is already behind the curve though. I just cant recall in recent history when the fed cut rates from what I consider not restrictive fed funds rate when:

1. Stocks indices are 2-3% off record highs
2. Energy prices at record levels
3. High commdoity prices
4. Very weak US dollar

all at the same time? Obviously they think the ultimate side effects of credit squeeze is a very serious threat worth taking care of now, at the expense of future inflation and further weakening of US dollar.

I worry that there is not much more to go on easing side of funds rate, and that the more aggressive moves in the future will be on the hiking side. But who the hell knows

Posted by: UrbanDigs | Sep 24, 2007 10:26:56 AM

sanjosie...good rant.

Liesman plays guitar?

Posted by: Global Savings Slut | Sep 24, 2007 10:28:20 AM

And continuing the printing of money for worthless pieces of paper (becaus if they had value they would'nt be "exchanging" them for cash) each and every day

Ben did a repo of about $10 billion today
and so did Hank.

You might think that the Treasurey and Fed were trying to actively abate any selling going into the redemption window.....

How could anyone get that idea when money is thrown at the market under the guise of an "auction".

And we have yet another bottom call by Goldman......

Ciao
MS

Posted by: michael schumacher | Sep 24, 2007 10:43:56 AM

It seems this Fed is willing to do anything to prevent housing prices from falling back. (Hey, they went up 100% in 7 years, if they fall back 20% what's the big deal? The only people hurt are speculators and those that pulled too much cash out). So instead, all of us are going to pay more for everything else. Screwy logic.

Posted by: SteveC. | Sep 24, 2007 11:03:42 AM

GlobalSavingsSlut: "My goodness. What has Bloomberg TV done?" I never thought I would do this... actually turned to CNBC :(

Bloomberg is now nothing more than a commercial and data less! what a shame... who sold them on this crap.

Posted by: Strasser | Sep 24, 2007 11:06:16 AM

Strasser: I am right with you. It is like it's run by amateurs over there and it just keeps getting worse. Someone has taken them way astray, and there is a revolving door for the anchor spots.

Posted by: Global Savings Slut | Sep 24, 2007 11:15:27 AM

Where oh where did you go Suzy Assad??

Will she show up at Fox in two weeks? or is it the old "spending time with the family" like Eric "family time" Bollings' mea culpa.

B'Berg went to hell in January......almost as if they were resigned to fighting Fox which they will all become at some point.

Ciao
MS

Posted by: michael schumacher | Sep 24, 2007 11:28:33 AM

Global Savings Slut, I saw Liesman play on air once - very good for a guy with a day job, too. Acoustic folk-style. I'd like to bring my dobro and pick with him.

Posted by: sanjosie | Sep 24, 2007 11:33:30 AM

December 2008

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