Inflation? What Inflation? (Part II)
Shorter BLS:
"The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 % in November before seasonal adjustment. The November 2007 level of 210.177 (1982-84=100) was 4.3% higher than in November 2006.
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 0.8% in November (prior to seasonal adjustment). November level of 205.891 was 4.6% higher than in November 2006."
>
The 0.8% gain was the largest since Hurricane Katrina's boosted CPI in September 2005. That was obviously a weather induced number, and you need to go all the back to January 1990 to find a comparable CPI price increase. And the so-called Core? 0.3% gain was the most since June 2001.
Miller Tabak's Peter Boockvar adds: "The implied inflation in the 5 year TIPS mkt has moved up
to 2.26% from 2.23% yesterday and 2.15% a week ago. The 10 yr bond yield is now
at a one month high. An aside, the CRB index yesterday closed less than 2% off
its all time record high." [BR: Peter corrected his earlier email -- thats 3% from Wednesday's close]
Nah, there is no inflation anywhere in the system. Where would anyone get an idea like THAT from? Just because Oil went from $18 to $95, home prices doubled over 7 years, and milk is now $4.29 a gallon doesn't mean there's any inflation. So what if the year-over-year wholesale prices (finished goods) was up 7.3% ! So what if Consumer prices rose 4.3% year-over-year from November 2006!
So, what do these inflation figures really mean?
Well, you can forget about a half point cut anytime soon -- at least until the Fed has gone from nervous to scared $#@tless. That's how you know they are in full blown panic mode.
~~~
Oh, and those Retail sales yesterday? Let's do some quick math: The monthly nominal sales data of plus 1.2%, when adjusted for inflation, was a much more modest 0.4% real. The huge 6.3% year-over-year surge I mentioned? Try a real number of 2%, after the 4.3% annual inflation.
One last thing: Now factor in an extra week of post-Thanksgiving sales, given how early the holidays were this year versus last.
I got your Polyanna's booming holiday shopping right here.
~~~
Yearly changes tend to smooth out more severe monthly fluctuations and give a better idea of the underlying rate of inflation:
chart courtesy of Barron's
>
Sources:
CONSUMER PRICE INDEX: NOVEMBER 2007
U.S. Bureau of Labor Statistics, December 14, 2007 8:30am
Division of Consumer Prices and Price Indexes
http://www.bls.gov/news.release/cpi.nr0.htm
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To complete the picture, the phrase "right here" is also accompanied with a vigorous crotch grab . . .
Posted by: Barry Ritholtz | Dec 14, 2007 10:36:17 AM
This one was easy to predict as the CPI numbers from a year ago were very low and even if the CPI came in as unchanged (unlikely) the y-o-y inflation rate would have bumped up to near 4% anyway. Why this was a surprise to anyone including the FED, I am not sure. Therefore, I still think they are likely to continue lower rates despite the increase in the inflation rate. I don't see why this should handcuff the Fed now. I just don't see lower rates helping the markets (beyond short term exuberance) anyway.
Posted by: Guy M. Lerner | Dec 14, 2007 10:48:04 AM
the data tells the story while the market makers jam job the closings so that it "appears" we had a gain. I heard on the radio on Weds. that the market had " a dramatic turnaround".....what was missing was that it gapped up almost three hundy points to end to day only up about 44. That was the dramatic turnaround..from the previous day of almost -300
none of this data means anything when the market is hijacked from one artificially created event while waiting for the next one to occur.
That is really the problem...not second-guessing already meaningless data.
We can argue about data all we want however until the market is taken out of the hands of the totally irresponsible (namely the VERY stupid and short sighted people who brought all this on themselves)
It will not matter one damn bit.
I mean seriously...Citigroup is up??? Most likely taking a huge bath on $49 billion and it trades up?!
totally and utterly ridiculous
Ciao
MS
Posted by: michael schumacher | Dec 14, 2007 10:55:41 AM
All of this is so silly. It is truely sad that your government lies to your face and manipulates data for self serving purposes. Inflation is not only the cruelest tax, it is also immoral. But look where we are socially. I guess Government is simply a reflection of who we have become. It seems that we are further down the road to serfdom than I thought.
That aside, if you got em, trade em.
Posted by: Ross | Dec 14, 2007 11:00:53 AM
Granted the points in all the preceding comments. Two other factors ought to be considered, no make that three:
1. If you look at the charts in the last Fed minutes they've started paying attention to no-core inflation numbers. Barry wins ! :).
2. That said those numbers are also telling us that they expect very slow (and therefore very fragile) growth next year, in '09 AND in '10. A growth recession will feel like a Recession btw. But the Fed is counting on being able to have slower growth pull down inflation.
3. The Fed's not just between a rock and hard place trying to manage the inflation vs recession tradeoff in a new environment. They/we are also facing an unprecedented freezing in the credit markets which is much more dangerous in the short- and intermediate-terms.
Let's make that four:
4. Oh, btw, just to make it more fun inflation is now beginning to spread from PPI (suppliers) to CPI (consumers). That's scary.
Posted by: dblwyo | Dec 14, 2007 11:37:08 AM
Contained? The only thing contained is the government borrowing costs. And they better make hay while the Bill Grosses of this world continue to plough other peoples money into sub zero return treasury bonds. The entire curve bar the 30 year is below the "official" rate of inflation. B-52 Ben has done his job admirably.
Seriously, how does one justify these yields without Japanese style deflation coming soon. We just had a Latin American style currency deval followed by inflation up in every category. And the bozos on CNBC see a "one time rise in prices." Who made Steve Liesman the economist on this channel. unbelievable.
Posted by: zao | Dec 14, 2007 11:47:07 AM
Barry - first, great embellishment!
Second, it would appear that the Fed is intent on loosening the money supply. If they were being driven by current inflation and employment data, they would either have held the Federal Funds Rate target steady or increased it by 0.25%. To get to a 0.25% cut with the current inflation data, the official unemployment rate would now have to go up to 5.0%, unless they're dramatically loosening the money supply. We'll know more next month.
Third, say what you will about high inflation, potentially higher unemployment, a slowing economy and the sub-prime mortgage driven credit crisis - none of these are doing much to drive the stock market.
Posted by: Ironman | Dec 14, 2007 11:51:50 AM
Can someone please explain how Larry Kudlow is a "free market capitalist," yet he continues to beg for the Fed to INTERVENE faster??
http://kudlowsmoneypolitics.blogspot.com/2007/12/fed-report.html
Barry, can you please call this clown out next time you are on CNBC? If he is a pure free marketer, then someone needs to hold him to it. It's morons like Larry who make the public think that the US Energy Bill is loaded with handouts to renewable energy companies when the entire issue revolved around leaving the $21b of tax subsidies for Big Oil (and Big Oil will now continue to receive our welfare). How does this lead to energy independence and a safer country like Larry asserts?
Posted by: SmartGuyStocks | Dec 14, 2007 11:54:12 AM
OK, so what's the answer?
* Oil - We don't control this. It has a floor put there by the OPEC cartel. It is currently demand driven because of a booming world economy. Exactly what is this or any administration supposed to do about it? They tried to get ahead of it years ago by trying to drill ANWR but were refused. It's still a 30 year process to get a new nuke plant here. It's not a whole lot better getting a new refinery. Wind power? Yeah, they're all behind it right until you want to put one up. Then Ted Kennedy whines about his Cape Cod view being spoiled and the ornithologists bemoan the dead birds that will fall to these silent killers. WWBRD? (What Would Barry Ritholtz Do?)
* Housing - Yes Barry, there has been a massive increase in housing prices over the last few years. There has also been a massive decrease in housing prices (particularly in the areas that had increased most) in the last year. The combination of cheap money and allowing 6 degrees of separation between a loan originator and the responsibility for the loan were both artificial stimuli to that market. It is being corrected in a major way as we speak. What else would you do? WWBRD?
* Food increased - Again, a growing global economy. Growing middle classes in various countries are now requiring more grain to increase meat production. The US is foolishly trying to use ethanol as a way out of the oil problem you highlight. We can stop the ethanol program but you still have the oil problem and the nuke and wind farm problems. WWBRD?
* Increased costs for finished goods - Yeah, because of increased energy, commodity, food and housing costs, workers and businesses need increased pay just to keep up. Would you cut their pay? Lower prices in spite of increased supply costs? Doesn't that make the other problems even worse? WWBRD?
Why do you insist on repeatedly putting up a straw man that most people think there is virtually no inflation out there? There is inflation, there almost always is. The question is, is it in danger of becoming runaway inflation and if so, what corrective actions can we take? Well, is it? WWBRD?
It's been obvious that the Fed has limited power at best to address the liquidity/credit crunch problems because they have limited, broad tool at their disposal. They are also between a rock and a hard place because the tools at their disposal which they would use to solve the liquidity/crunch problem could easily make your inflation situation even worse. So again I ask, respectfully, WWBRD?
Posted by: Mike G. | Dec 14, 2007 12:08:04 PM
Mike g.
the problem to any solution is not very difficult if we remove all the hidden agenda on the table.
wall street does not want anything bad right now, hence they want to postpone as long as possible.
current administration want to postpone the worst till 2009, a very good way to put this in the next admins plate, how crafty.
we are like the debtors neck deep in debt, so the only way to a fix is take pain for the next 3-4 years, starting now.
Posted by: techy2468 | Dec 14, 2007 1:08:21 PM
Techy2468:
Oh I agree! Wall St. wants to keep that CDO/SIV/CRAP off the books as long as possible (preferably until by some miracle they wake up and find it actually worth something one day). But that really isn't an inflation issue. It's a stock market issue as they'd all take a downgrade like Citi did today (and Lehman?).
If the issue is inflation, and the beef is that we are arguing over core vs. "real" inflation and whether it is out of control or not, then my beef is "OK, congrats to you. You are the Paul Revere of economics. By crying "Inflation is coming! Inflation is coming!" you've (Barry) woken us up. Now what? What are we (Fed/Investor/Mike G.) supposed to do about it? For me nothing's changed. I go long things I think will go up and short things I think will go down.
Sorry to rant, but I guess my real beef is the straw man that keeps getting tossed out, namely that there are all these people crying "NO inflation at all!!" They are few and far between (Cramer?). Kudlow et al admit there is inflation, but they see other (good) news at the same time to somewhat balance it. That doesn't make them crazy or wrong (yet).
Posted by: Mike G. | Dec 14, 2007 1:22:21 PM
These are some good questions Mike G. I will attempt to answer these one at a time.
"Oil - We don't control this. It has a floor put there by the OPEC cartel. It is currently demand driven because of a booming world economy."
WRONG. The latest surge in OIL prices is Fed's irresponsible easing campaign. Oil is up >30% since Aug 16th easing started. Dollar tanked and the price of everything priced in dollars rose. OPEC cartel you say? Why is wheat up or other grains? Why is CRB showing 30% gains since Fed cuts started? Is it the midwestern corn cartel to blame?
Housing - About time the CPI start showing the housing inflation all of us have experienced. What do you propose? Since it may already have peaked, you can't just ignore that price levels are up.
Food increased - See point about oil.
Increased costs for finished goods - Even prices of imported goods from China are increasing. Tanking dollar. again due to Fed policy.
I posted some stats about the 70s on this blog a while ago. Fed rate cuts are not the answer to inflationary pressures. That just helps translate commodity price increases into everything else. And gets into inflation expectations. The Fed accomodated the commodity shock of the 70s and we paid the price - weak growth and high inflation. The Buba in Germany did not cut rates like us and had much more moderate inflation with the same growth rate. You are right, the Fed can't lower the price of oil. But medium term, by reigning in the money expansion it can control how the price of oil affects price inflation for other goods and services, wages and inflation expectations. and once they come unhinged, you need to overdo it on the tightening. We have been through this debate before. Milton Friedman won a nobel prize for this. We are going down the same path by saying that the Fed can't do anything about commodity prices. so let us just worry about cutting rates to save the economy. It is an expensive mistake to repeat.
Upshot is - Fed should not cut rates anymore. My estimate is that they should keep rates above 4% even if the economic growth is zero.
Posted by: zao | Dec 14, 2007 1:24:38 PM
I only buy core items so even though prices went up a little bit more than expected, it didn't bother me as much as others who bought food and gas.
Posted by: Charleston real estate blog | Dec 14, 2007 1:50:19 PM
I agree that the weak dollar contributes to some of the commodity increase, but that's too simplistic to hang the inflation hat on that alone. As for the policy itself, they took a drastic move after 9/11 and left rates too low for too long, then raised too many times and too much, just in time to trap the subprime mortgage holders. But the mortgagees aren't the Fed's responsibility (nor are commodity prices). The economy and jobs growth are their responsibility.
While the weak dollar has a down side (!), one up side is the boom in exports for US manufacturers and the boom in all that grain we grow. The general reason for increased grain prices is that which I already stated. But don't take my word for it. So "weak dollar" is just too broad a brush IMHO.
Increased prices from China have more to do with their sizzling economy and competition for workers than our dollar (they are largely pegged to our dollar).
But hey, let's say your're right. Put it all on the dollar. What's the fix? Raise interest rates to strengthen the dollar? I don't know about you, but timing is everything, and jacking up rates as we enter this massive credit/liquidity problem and an economic slowdown is probably not a wise idea. If we do that, then Barry's focus will change from "Inflation is coming!" to "Recession is here!" I'd rather have the inflation as long as we keep it controlled. YMMV.
Posted by: Mike G. | Dec 14, 2007 1:57:30 PM
I only buy core items so even though prices went up a little bit more than expected, it didn't bother me as much as others who bought food and gas.
--------------------
Yeah, this is another tiring canard. The system admittedly is far from perfect, but the reason the "core" does not include certain things it because those certain things tend to be fairly volatile and if you rely on them you have accurate data but data you can't get any kind of conclusion from. The chart of true inflation will look like a seismic monitor chart from the San Andreas fault. Tell me the Fed that's gong to base policy on that and have any luck. The work off consensus! What group is going to look at that kind of chart and come to a consensus (let alone a correct one)?
Posted by: Mike G. | Dec 14, 2007 2:02:34 PM
It is not all on the dollar. It is all THE OVERLY LAX MONETARY POLICY, as you yourself say. It has become synonomous with the dollar lately. The falling dollar as a result of rate cuts is just the price of our money falling in everything else - foreign fx, gold, commodities, oil and now, goods and services.
Address the core cause - easy money.
The credit crunch will not be solved by rate cuts. It is not a liquidity problem, it is a solvency problem as calculated risk and now Paul Krugman are saying. they agree with you.
Barry's and my point is - keep an eye on inflation. Don't cut too much. Just as oil might be temporary, why might not be the blip in economy temporary. somehow the tolerence for inflation is a lot more than any dip in growth.
Posted by: zao | Dec 14, 2007 2:03:25 PM
SLANDERER! Let me be crystal clear. Paul Krugman and I have never agreed on anything!!! Quoting that DBag as an economist is like quoting the Mad Hatter on philosophy. He's another clown that's predicted 10 of the last 3 recessions.
I think the Fed is trying to do exactly what you and Barry want - keep an eye on inflation. Lowering the Fed Funds rate wouldn't really be the answer to most of today's problems, but they should have dropped the discount rate by 50 bps. They need to right the inverted yield curve (and I'm not quite sure how you do that at this point). But that's a tough thing to do, especially now. Part of what they need to do is just not cock up the Fed statements though! The last two have been abysmal!!
Posted by: Mike G. | Dec 14, 2007 2:17:30 PM
haha! got you there.
Seriously. why do you think they raised too much? They did not raise enough or fast enough. Mr. Greenspan destroys the term premium in the forward rates by perfectly telegraphing his shitty 25bp per meeting hikes, convinces the market that inflation is dead (how else do you explain 10 yr < YoY inflation) AND THEN RUMINATES ABOUT ESOTERIC CONUNDRUMS. As the BOJ governor Fukui very politely said at one of the central banker meetings - "It might have something to do with very low rates in the front end of the yield curve. We know all about that."
Posted by: zao | Dec 14, 2007 2:30:12 PM
But it's easy to take the volatility out by having a moving average. So the effect of higher food prices would be accounted for, not as silly as reducing the price of computers, because you are getting more for the increased price.
Posted by: Big Al | Dec 14, 2007 2:30:35 PM
I think they definitely kept raising too long and they probably raised too much. I think too much because even though the moves were gradual, they moved EVERY meeting for what? 15 meetings in a row? Pause and see how things are! The economy has been healthy but hardly on fire since recovering from 9/11 at least as far as jobs growth (earnings were spectacular). They had room to err on that side.
Having said that, the CDO thing was not and should not have been a Fed concern. Some part of the administration should have seen the writing on the wall from the home loan data (seeing all the adjustable zero-down, interest only, no-doc loans) and had a real heart to heart with that industry saying "You can do whatever you want, but we WILL be making you put this crap on the books and we will NOT be having the taxpayers bail your sorry @sses out."
I'm not sure who, but some oversight group (congress? They seem to like to oversee damn near everything) was asleep at the switch.
Posted by: Mike G. | Dec 14, 2007 2:39:51 PM
Mike G: all good points.
It all boils down to one thing: inflation that we are seeing is almost entirely commodity driven (wages barely are keeping up). If a recession on a global context is in the cards, then price deflation is inevitable.
The question remains is it from higher levels.
That said, the fed has room to cut rates if they are looking to a global recession.
Additionally, the commodity runup is only fractionally a result of fed policy. And its definitely not a result of the 9/18 50bp cut. Even though it looks that way on the chart, the commodity bull has been churning for much longer.
I suggest that the real problem here is not the fed, but US lawmakers unable to make any change to ENERGY POLICY. They reject an energy bill calling for increased efficiency to 35mpg (or was it 40?) by 2020 just the other day. No new nuclear electricity sources get completed any time soon; ethanol subsidy has entirely backfired on fiscal logic, spurring use of food as energy (wheat and soy would not be 9.75+ and 11+ if it were not for corn overplantings).
Blaming everything on interest rate targets poorly managed is an ill conceived and overly simplistic notion.
I guarantee those CPI and PPI #s would be a non issue if oil market supplies were a non issue (and only way that happens is if consumption gets cut).
Fortunately, China growth slows much more quickly from $95 crude than US growth, and should widen the supply/demand margin on crude and thus everything else sooner. I guarantee this will affect CPI/PPI going forward in a much more obvious way than any fed policy.
Take a look.
http://scriabinop23.blogspot.com/2007/12/is-treasury-bull-done.html
Posted by: Mike Krause | Dec 14, 2007 2:41:15 PM
BUT I must give one pass to the overseers. The secret sauce to this scam was the mis-rating of all that debt. So I guess I can only fault the would-be overseer so much. The CDOs are complex things and asking someone to catch Moody's mis-rating absolute poo for AAA may be a big much to ask.
Posted by: Mike G. | Dec 14, 2007 2:45:23 PM
Are we the same person Mike G? Totally agreed.
The collusion of ratings agencies with CDO issuers to even enable the subprime buyer into the housing market did not exist in past housing booms.
Right now we are suffering the effects of typically overlevered banks having to pay the piper for poorly done initial CDO asset valuation models.
Read right from the link I sent you.
Posted by: Mike Krause | Dec 14, 2007 2:52:58 PM
On Bloomberg just now - Dan Fuss (Loomis Sayles):
* More worried about credit problem than inflation. Sees inflation dropping in '08
* Credit system is a confidence problem really
* Sees fed cutting 3 more times
* Steeper yield curve will be beneficial to the corporate system and the credit system.
* US needs another 100 basis points of the short rate
* Likes the recent Fed strategy, they may have to add to it though
* Infers that if needed, there will be more money into that despite inflation #s.
* Housing prices are now DEflationary
So I am in good company!
Posted by: Mike G. | Dec 14, 2007 2:53:46 PM
Mike Krause:
We have outed ourselves! LOL
Posted by: Mike G. | Dec 14, 2007 2:56:36 PM
