Consumer Prices Surge Most Since 2005 (Not 1982)
U.S. consumer prices soared in June. The stagflationary mix of rising unemployment, strained financial markets and rising inflation, painting the Federal Reserve into a box.
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UPDATE: 7/16/08 3:51pm
Not-so-tiny correction: The rise in the CPI was not the worst since 1982; it's actually the worst since 2005. The BLS gave reporters inaccurate historical comparisons, but they have since corrected them. They stand by the actual numbers!)
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Consumer Price Index surged 1.1% in June, almost twice the rate in May, and far above the consensus expectations of Wall Street economists, who were looking for a 0.7% rise. It was the biggest monthly gain in the inflation indicator since June 1982. Year over year, the price index has risen 5%, the biggest 12 month jump since May 1991.
Medical care prices, meanwhile, increased a modest 0.2%, while clothing prices rose just 0.1%. These were the only bright spots, as other components posted sharp gains:
Transportation prices rose 3.8%
Airline fares swelled 4.5%
Energy prices jumped 6.6%
Gasoline prices spiked 10.1%
Natural gas prices rose 4.9%.
Food and beverage prices rose 0.7%
Commodity prices soared 1.9% (a record monthly high).
(Charts below)
The core rate increased 2.4% from June 2007, also far more than consensus expectations.
Adding insult to injury, the Labor Department noted that "average weekly earnings of U.S. workers, adjusted for inflation, fell 0.9% in June." This means that the typical American household income is failing to keep up with rising prices.
>
Charts via Jake
>
Source:
Consumer Price Index Summary: JUNE 2008
BLS, July 16, 2008
http://www.bls.gov/news.release/cpi.nr0.htm
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Wednesday, July 16, 2008 | 10:19 AM | Permalink
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Comments
How long before Dick & Jane begin robbing banks?
Posted by: Chief Tomahawk | Jul 16, 2008 10:34:58 AM
I have complete faith in the Plunge Prolongation Team put together by our revered Commander-in-Chief and Karl Rove... Hallelujah.
Posted by: VennData | Jul 16, 2008 10:38:29 AM
If we look at this from a purely political perspective, the "wages are falling 0.9% after adjusting for inflation" is very big.
I don't think the Fed has much wiggle room now if it wants to be in the country's good graces: it'll have to raise interest rates.
Posted by: rj | Jul 16, 2008 10:44:06 AM
Barry, obviously that release was a mistake. Someone accidently put out the real CPI figures. Next month the Commerce Dept will issue an adjusted figure that will show no inflation.
It can get confusing keeping two sets of books!
Posted by: Christopher | Jul 16, 2008 10:51:50 AM
"How long before Dick & Jane begin robbing banks?"
Not to worry Chief;
by the time depositors have made their runs, there won't be any cash left in the banks.
Posted by: Pool Shark | Jul 16, 2008 10:54:06 AM
June CPI rose a higher than expected 1.1%, .4% more than the forecast the core rose .3%, .1% greater than the consensus. Y/o/Y gain in headline CPI is now 5%, the highest since May 1991. Core CPI y/o/y is up 2.4%, the most since March. Owners Equivalent Rent (24% of CPI) rose .3%, the most since Jan and actual rents rose .7% after rising 1.3% in May and helped to lift the core #. With more and more people renting instead of buying, this trend is worth watching. Energy prices rose 6.6% m/o/m and food rose .8%. Keeping a cap on the core # was another modest gain of .2% in medical care. Vehicle prices rose .1% as car price increases offset a decline in truck prices. Bottom line with respect to the Fed, the banking system and credit markets are their main focus and the inflation issue, notwithstanding comments to the contrary, will take a back seat.
Posted by: Peter B | Jul 16, 2008 11:05:36 AM
Here comes the market rally. Will it last? I say no, sell into any significant strength.
Posted by: Jeff | Jul 16, 2008 11:06:36 AM
By my calculations I’m getting a 13.43% annualized increase. Is that right, or did I mess up my math?
Posted by: Petro | Jul 16, 2008 11:11:24 AM
So the market seems to be rallying on "good news" from WFC (Yay! Profits down ONLY 22%, so we'll raise our dividend 3 cents). Anyone else think that this optimism might get taken down a little later in the week when Merrill and Citi open their traps?
- HCF
Posted by: HCF | Jul 16, 2008 11:22:40 AM
1982, the fed funds rate that year topped out at 14.9 percent; the year before it hit 19.1 percent.
1982 was the second year of the feds campaign to reduce inflation. That time around it took four years, an unemployment rate of 11 percent and over 11 million people out of work to bring down prices.
Cheap money always leads to inflation, and speculative bubbles, sound familiar? Inflation is like cancer, by the time you detect it it's too late, and the treatment will stop it but makes you even more ill.
Ben wanted to prop up equity markets, and bail everyone out...while Rome burned.
Posted by: Richard | Jul 16, 2008 11:34:08 AM
Since early last year, my estimate of cost-of-living inflation has been 5-6%. Today, the government's CPI finally caught up, rising 5.0% y-o-y.
But bearing in mind the hedonic and substitution adjustments which tend to trim about 1% off the CPI, the "real number" that "real people" are seeing is at least 6%. And 6% is pretty high, a "danger zone" number when the Fed Funds rate is only 2%.
Four percent negative real interest rate -- what's that spell? They're trying to create another Bubble, even as this one wheezes and fizzles. And believe me, with the usual lag time -- two or three years -- THEY WILL.
The key to investment success at decade's end lies in identifying where Ben B's "Bubble III" will be concentrated, and buying it with monster leverage. Borrow at 2%, earn 6%, and amp it up with 10 times leverage. Congratulations -- you're a bank!
Posted by: Jim Haygood | Jul 16, 2008 11:56:54 AM
Once again, the Fed has made its choice: inflation is the sacrificial lamb; it will destroy the middle class while sparing the wealthy. Lucky them, the Fed has also decided that the financial system ought to stay as is. It is just a matter of giving it, repeated injections of liquidity elixir and hocus pocus! alakazam! He shall revive and walk again.
As for the 90% of us? It is mind over matter. They don't mind, and we don't matter!
Posted by: Francois | Jul 16, 2008 11:59:55 AM
Petro: Annualizing changes from a very short period does not make a lot of sense. Price hikes follow a step function, the most notable exception being gas prices, which are essentially "real time". Most retail prices are not adjusted a penny a day but a few dimes per month(s), so you have to average things out over let's say a year, or at least 6 months. Substantial hikes in a short period are still relevant, but they can inform you only qualitatively.
Posted by: cm | Jul 16, 2008 12:05:11 PM
Not long ago my boss all excited tells me the good news that the company is now going to pay for part time workers vacation. Being the cynical wretch that I am I rolled my eyes and laughed because I KNOW there must be a catch. To which my boss admonished me for being so sarcastic....a week later I get an e-mail from my company and indeed they are going to start paying for vacations but it is the end of paid holidays!! Since I only work 3 days a week and used to get paid for 7 holidays....hmm...and the new people have to wait a year before they can start accumulating vacation.
This is the kind of stuff that is silently and slowly eating away at the incomes of most workers.I doubt it ends up on a chart that you can look at.
Posted by: liz tool | Jul 16, 2008 12:21:45 PM
OT: Isn't it about time that Meredith, the both ways hot banking analyst, analysed Wells?
I saw their numbers. How does it happen that everyone else standing in the rain is getting wet, but Wells claims to be staying dry? Are they the Goldman Sachs of commercial banking, or are they just good at accounting?
Posted by: Donkei | Jul 16, 2008 1:09:27 PM
Jim Haygood - you got it! And the next bubble is already identified as alternative energy!
Posted by: RENEWind | Jul 16, 2008 1:13:36 PM
What do you know. The Bush administration agrees reluctantly to meet directly with Iran in negotiations about nuclear power, and oil starts to drop. Almost like the run up is due to the entirely insanely aggressive Bush policy in the Middle East. But that can't be - after all, we were pushin' for freedom! I'm sure that future investors understood that.
Watch as the Bush people reverse oil's downward track by pushing some other bit of aggressive nonsense in the Gulf region. My guess: the Washington Post and NYT publicizing some standard rhetorical claptrap from Iran's president, of the type that is common, as well, in Saudi Arabia (but of course never publicized). Has to happen. Almost like Bush's buddies make money when the price of oil rises.
Posted by: roger | Jul 16, 2008 3:38:01 PM
Barry: Tiny correction: The rise in the CPI was not the worst since 1982; it's actually the worst since 2005. (The BLS gave reporters some inaccurate historical comparisons, but has since corrected them. They stand by the actual numbers!!)
Posted by: Rex | Jul 16, 2008 3:51:17 PM
We hear a lot about the government methodology understating CPI, but the Owner's Equivalent Rent estimate that now says we have housing inflation seems to run inverse to reality and confuses me a bit (easy to do).
When home prices were rising parabolically in some areas Owner's Equivalent Rent was giving a false impression that housing inflation was low. Now with a financial debacle in progress that was triggered by falling home prices ORE is saying we have housing inflation. Given that housing costs are the largest single factor in most household budgets it seems that we aren't getting a very good estimate of this component.
I'm sure Bernanke has made his share of mistakes, but I actually have some empathy for the guy. The Fed is being asked to do all things financial these days because there's no leadership from either the executive or congressional branches of our government. I'm surprised Bernanke hasn't been asked to cure cancer and win the war on terror. There's no way the Fed can accomplish all that's being asked of it.
I'm still trying to maintain some optimism that inflation will abate. Won't the contraction in credit availability due to tightened (a.k.a prudent) lending standards perform the same function as a Fed Funds rate increase?
My optimism may be misplaced (which happens a lot). Perhaps the "Guns and Butter" policies that we've been promoting (wasn't there another President from
Texas who tried this?) will lead to a 70's style stagflation-lite. However, rather than a Volker like attack with Fed Funds rate, why not target the main culprit in the inflation problem - energy. A gasoline tax increase would be more efferctive in crushing petroleum demand than would a general rise in interest rates. Do we really need to tank the whole economy to deal with this? Alas, I realize that even if this were the prudent thing to do it would never happen.
Now, back to my regularly scheduled Guinness.
Posted by: GuinnessFan | Jul 16, 2008 4:43:22 PM
Nasty nasty numbers... this will renew calls for a hike from the FED dissenters.
I think we can expect to see the Bear Steepener in full force. Get long the 2-year and short the long bond. Easy money.
Posted by: leftback | Jul 16, 2008 5:33:04 PM
I noticed the very same meme:
BERNARD BAUMOHL, DIRECTOR, ECONOMIC OUTLOOK GROUP: Every once in a while we all make statements that seem outlandish to others. But when we hear it from the Federal Reserve, well, then you have to ask, what were they thinking? We know that inflation is public enemy number one at the Fed, as it should be. But then several officials there suddenly began to sprinkle their speeches with warnings that a wage and price spiral may fire up inflation, and that struck me as bizarre. The Fed's argument goes something like this: To offset higher price food and energy prices, workers will demand more pay, and that would force companies, who want to protect their profit margins, to raise prices on consumers. The fear is this could trigger a vicious circle between employees and employers. True, wage and price spirals have caused inflation to flare up in the past. But higher wages will not inexorably result in more inflation, and certainly not in this economy. First of all, let's give American workers a break. While food prices have jumped 5 percent and gasoline 40 percent over the past year, average weekly pay has edged up a miserly 2.8 percent. In fact, wage increases have fallen behind inflation in each of the last nine months, shrinking the purchasing power of workers to their lowest in two years. Ironically, this has happened as labor productivity jumped by its fastest pace since 2004. Rising productivity permits companies to lift wages without hurting earnings. For these reasons I think Fed warnings that higher wages can fuel inflationary pressures are misplaced and premature.
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Posted by: VJ | Jul 16, 2008 6:39:04 PM
