Inflation At 17-Year High
Wow! Big pop in inflation last month: July CPI rose 0.8% headline, 2X consensus expectations as food, energy, airline fares and -- of all things, clothing apparel -- rose in price.
The meaningless core rate rose 0.3%, 0.1% more than expected.
Year over year price increases are 5.6% -- the biggest monthly gain since gains January 1991. Risers include 1.2% gain in apparel (14,4% annual!), 0.4% gain in recreation, 1.2% gain in tobacco and a 1.3% gain in airline fares.
Energy prices rose sharply in July, tagging on another 4%; gasoline gained 4.1%, while natural gas surged 7.4%. Food prices saw a 0.9% rise, and "food at home"increased 1.2%.
Apparel has been one of those few sectors that have seen downward pricing pressure over the past few years, so this is somewhat surprising -- and perhaps aberrational. Services inflation (ex energy) rose 0.3%. Annualize the 0.8% monthly gain and its 9.6% (this is not accurate due to significant seasonal variations in July)
The headline number should recede in coming months due to the decline in oil and commodity prices, we still have a up big year over year gain across the board. The WSJ noted that the "surprising rise in core inflation that excludes food and energy last month will keep officials on edge about the possibility that food and energy prices will become more firmly entrenched in the economy."
In normal economic cycles, recessions typically bring about a deflationary environment. One would expect to see significant demand destruction as the economic contraction continued, impacting prices negatively and moderating inflation. While that demand destruction appears to have occurred in Crude Oil and a few other commodities, it has yet to happen across other goods and services.
There remains the outside possibility that this will be an inflationary recession -- let's hope otherwise.
Charts via Jake at Econompic
>
Sources:
Consumer Price Index Summary
CONSUMER PRICE INDEX: JULY 2008
http://www.bls.gov/cpi/
http://www.bls.gov/news.release/cpi.nr0.htm
U.S. Inflation Hits 17-Year High As Increases Move Beyond Food, Oil
BRIAN BLACKSTONE
August 14, 2008 9:55 a.m.
http://online.wsj.com/article/SB121871617494640459.html
U.S. Consumer Prices Rose More Than Forecast in July
Shobhana Chandra
Bloomberg, Aug. 14 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aL2cNvLZtzMg&
Thursday, August 14, 2008 | 10:17 AM | Permalink
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Tracked on Aug 14, 2008 3:29:52 PM
Comments
BR, do you really hope otherwise? At the risk of triggering indignation, it's pretty clear that the MAJORITY of people who populate this blog would absolutely LOVE a steady stream of stagflationary developments that send the markets much lower. I mean, c'mon, this blog has a lot of gold, canned preserves and ammo storing types of people on it. And that's fine. But it's hard to believe someone who is positioned bearishly is not hoping for bearish news.
Posted by: Eric | Aug 14, 2008 11:37:23 AM
Even with energy much lower than the current spot price it will take years for the inflation to work through the system.
I was just looking though a list of the Year to date returns of all the markets in the world.
The top 3 are...
Kuwait +16.4%
Caracas +3.1%
Russell 2000 -0.9%
We hit flat for the year at IWM 75.90.
Too many shorts?
Posted by: Vermont Trader | Aug 14, 2008 11:40:06 AM
It's 1980s all over again. I see that Central banks around the world are raising interest rates to fight inflation except of course our own central bank. Stagflation is unavoidable. I think Fed will be forced to raise rates at a faster rate (over 10%?) by 2009 year end.
Posted by: manhattanguy | Aug 14, 2008 11:47:55 AM
Too bad we can't eat computers (although it is a shame that they have become so cheap that it is cheaper to buy a new one than to hire someone to clean all the malware off my home PC....)
Posted by: Mr. Obvious | Aug 14, 2008 11:48:11 AM
This will be a deflationary debt crash. It is just getting started. Pull up a chair. The rise in prices is some other phenomenon. We'll know what it was in hindsight...massive printing of money? commodity hoarding by China? It can't last much longer.
Posted by: Steve Barry | Aug 14, 2008 11:49:02 AM
Looks like the FED is getting what they want,
(and it has to be a modern miracle right?)
Higher inflation(5.6%) and lower yields (TNX-3.9% - FVX-3.2%) with yields going lower after the report that inflation hits a 17 yr. high...
Inflation hawks, my a$$
There is a free lunch (for some)
Maybe Greenspan can call a bottom and/or top on inflation???
Posted by: MarkTX | Aug 14, 2008 11:49:33 AM
OT. Rumour to be spread via blogs. There is a run on the bank at Downey Financial Corps.
cc Sheila Bair
Posted by: Peter | Aug 14, 2008 11:52:53 AM
OK, so which is it, inflation or deflation? I don't see how we can have both at the same time (maybe we're going to slam back and forth between them until our brains explode).
The collapse of the debt infrastructure sure LOOKs like deflation, but the soaring rate of inflation says otherwise.
Which is it? Are we still in Kansas, Dorothy?
Posted by: constantnormal | Aug 14, 2008 11:59:06 AM
Eric, I have relatively few canned preserves and a little gold, but I promise you that the FED likes these inflationary numbers more than I do. It's deflation that will really feed the Bears....
The inflation is almost all in the rear view mirror. These numbers will start to subside now that the oil spike is behind us.
Steve Barry is right - this is deflation on a large scale - and it is now right in front of us and the reason most people cannot see it is because they have never lived through it. So many people are blinded by the world in their faces they cannot see forward.
Just ask the Japanese about 50% haircuts in RE and 80% drop in the Nikkei. Compare current JGB yields with Treasuries and you can see where we are going to go. As Mish points out: "what can't happen, is about to happen.."
Do you really think we are all smarter than the Japanese and the FED is smarter than the JGB? Bernanke is out in a rowing boat trying to fix the levees with chewing gum and the hurricane is about to bear down again.....
Posted by: leftback | Aug 14, 2008 12:16:57 PM
There are too many houses, stores, offices, cars,clothes,electronics, etc. Too much of everything except jobs, wage increases and, consequently, demand. With the jobs picture deteriorating here and recession spreading around the globe, it can only get worse.
Posted by: rww | Aug 14, 2008 12:17:30 PM
OK, so which is it, inflation or deflation?
Are we still in Kansas, Dorothy?
Posted by: constantnormal | Aug 14, 2008 11:59:06 AM
Actually we are on "Animal Farm".
"Somehow it seemed as though the farm had grown richer without making the animals themselves any richer— except, of course, for the pigs and the dogs."
Posted by: MarkTX | Aug 14, 2008 12:17:34 PM
Apparel prices rising aren't too shocking - almost all apparel has been imported for years now, and the dollar was tanking during that period.
Also, cotton prices spiked some time ago - it just takes a while to work through the system. (Cotton prices are back down now, of course.)
And lastly, how many apparel plants are near Beijing? I don't know, but don't forget that most of the plants near Beijing have been shuttered for quite a while now, so we can actually *see* the athletes compete. What would tend to have a deflationary effect on raw matierials, and an inflationary effect on finished goods - and much of our apparel comes from China.
Posted by: Jim D | Aug 14, 2008 12:26:59 PM
Of course, this myth that Japan has suffered this past generation is pure bunk. The Japanese have and continue to enjoy one of the highest standards of living in the world. I would love for the US to experience what Japan went through in the next decade.
Posted by: jodie | Aug 14, 2008 12:30:12 PM
"Of course, this myth that Japan has suffered this past generation is pure bunk. "
Every single person who bought Tokyo real estate during the bubble is still underwater, 20 years later. Bunk?
"I would love for the US to experience what Japan went through in the next decade."
Be careful what you wish for.
Posted by: Jim D | Aug 14, 2008 12:35:41 PM
So real estate in Boston, NY and San Francisco might become more affordable for people who want to live there. Oh my what a travesty.
Posted by: jodie | Aug 14, 2008 12:40:11 PM
Asset prices have been pumped up by DEBT. The first equation you learn in accounting is ASSETS = DEBT + OWNER'S EQUITY. Once equity gets wiped out and the debt crashes, what happens to asset price? Home prices that are underwater all all debt and the debt is crashing. Someone may come along and pay something for the asset, but then someone eats the bad debt.
Posted by: Steve Barry | Aug 14, 2008 12:43:32 PM
jodie -
"Of course, this myth that Japan has suffered this past generation is pure bunk"
exactly, that's my point. The Japanese decided to allow investors in over-inflated asset classes to bear the brunt of the long recession, rather than to punish the populace by printing money and causing runaway inflation.
Japan had net savings and the US has enormous public and private debt. We can look at Japan as a best-case scenario - given US government debt it is unlikely that yields can stay as low as in Japan.
Although Treasuries will go much lower, spreads are going to go through the roof for all kinds of corporate, municipal and personal debt. Keep an eye on LIBOR. The credit markets have some very unpleasant surprises in store for equity investors.
Posted by: leftback | Aug 14, 2008 12:48:35 PM
Where the dollar is now, will kill 4Q growth for multi-national tech companies. Last year 4Q got a 5-10% boost y/y...this year may even get a hit. And tech companies with ltttle commodity input costs (GOOG, MSFT, etc) will not benefit from lower COG.
Posted by: Steve Barry | Aug 14, 2008 12:49:35 PM
"The Japanese decided to allow investors in over-inflated asset classes to bear the brunt of the long recession, rather than to punish the populace by printing money and causing runaway inflation."
Well said!
Posted by: jodie | Aug 14, 2008 12:52:18 PM
as constantnormal sez:
"OK, so which is it, inflation or deflation?"
and until such time that becomes clear(er), how does one position one's assets.
Sitting on cash can try one's patience, n'est-ce pas?
Posted by: batmando | Aug 14, 2008 12:56:07 PM
With inflation so obvious and prevalent, does anyone have an opinion regarding why the precious metals aren't shooting through the roof? Is there any credence to the gold manipulation theory?
Posted by: Willard Sing | Aug 14, 2008 1:06:21 PM
W Sing:
Another question...gold went from 350 to almost 1000...Newmont Mining, the largest gold miner, trades below where it was in 1996. Some of the smaller miners did well...but WTF is up with this? Turned me off to gold.
Posted by: Steve Barry | Aug 14, 2008 1:22:47 PM
The surge in apparel is related to China not because textile plants are closed for the Olympics but because of US quotas - prices have surged in the categories where quotas have been met and imports from China have declined this year BUT the safeguards on 34 major categories of imported textiles from China will end on December 31. This is a part of the USA-China trade deal passed under Clinton and will have a major impact on imports of textiles starting next year unless Congress is pressured to do something to thwart the trade.
Posted by: Sinomania! | Aug 14, 2008 1:29:42 PM
Oh my, a Mish fellow traveler.
Inflation is deflation, black is white, and have you ever noticed that a deflationist like Mish calls for buying gold?? If you believe in deflation, you should be in cash.
Anyway, companies have been squeezed on the way up with their inputs, naturally, they raised prices quickly. As the y-y comps ease up on input price increases, they'll slowly ease up also on the consumer prices, but INflation (not DEflation) will be with us longer than people think; longer than is typical for recent recessions.
Again, this decade is a rhyme of the '70's.
Posted by: David | Aug 14, 2008 1:37:54 PM
"So real estate in Boston, NY and San Francisco might become more affordable for people who want to live there. Oh my what a travesty."
Exactly. This is my perfect outcome - when useful members of society like teachers, greengrocers, software engineers, scientists, inventors, police and firemen are able to buy homes in the communities in which they work. Of course this might leave a few realtors, bankers and other financial parasites out in the cold.....
Socialism, in a way - or at least a more fair society - but achieved by allowing efficient markets to function without interference from the banking class and others who claim to create wealth but in fact produce nothing.
Posted by: leftback | Aug 14, 2008 1:41:50 PM
