Look Ma, No Inflation!

Friday, October 14, 2005 | 09:34 AM

There is no inflation, and we's gots da data to prove it (Pay no attention to the man behind the curtain).

(I cannot stop laughing, it hurts so much, please make it stop)

Cpi_september_05So let me make sure I understand this:  U.S. consumer prices rose at the fastest pace in 25 years, and that is somehow a positive for the economy and/or the markets?


Let's drill down into this nonsense before it costs too many people too much money (although Darwin might suggest that we allow the terminally dumb to starve themselves to death so as not to pass along their fool BLS-believin' genes).

1) Core commodities prices up .1%.  This is taken as proof that, except for items going up in price, there is little in the way of inflation.

While that no inflation (ex-inflation) may be plausible to the naive, I interpret it very differently. To me, this means that there's little ability to pass along  producer price increases to the consumer. This will inexorably lead to margin squeezes, and sure as day follows night, that will impact earnings

Commodities 5 Year Chart (no inflation here -- just rising prices)
click for larger chart


2) Core services I: With Housing Prices at all time highs and the affordability index at 14 year lows, we see that "Owner Equivalent Rent" is up a mere +.1%. Need I detail how silly this is? Home prices  are up dramatically, and recently we see that morgage rates have ticked up significantly (now over 6%). Its no surprise that mortgage apps have dropped 3 consecutive weeks.

Core services II: Medical Service prices up a mere +.3%.  Anyone who has so much as a had a cavity filled knows the correlation of this tortured data to reality is approaching zero.

4) Wage Pressure: The only real bright spot in the inflation data is "Worker earnings relative to inflation. They fell, as the the Labor Department reported "real average weekly earnings of U.S. workers, adjusted for inflation, fell 1.2% in September." That marks the third consecutive monthly  decline of real wages (average hourly earnings rose 0.2%).

So the only place where there is no inflation is in the pocketbooks of the consumer, whom I must remind you accounts for 70% of the economy.

(Hey Ritholtz, any other cheery news you can bring to our attention?)

Yeah, the new consumer bankruptcy laws take effect Monday.

That is all . . .



Consumer Price Index Summary (PDF)

Consumer Prices Jump 1.2%; Retail Sales Advance by 0.2%
DOW JONES NEWSWIRES, October 14, 2005 9:15 a.m.

Friday, October 14, 2005 | 09:34 AM | Permalink | Comments (19) | TrackBack (3)
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» Inflation rears its ugly head from Abnormal Returns
Barry Ritholtz has been on this theme for some time, but nails it today. So let me make sure I understand this: U.S. consumer prices rose at the fastest pace in 25 years, and that is somehow a positive for the economy and/or the markets? Puh-leez... [Read More]

Tracked on Oct 14, 2005 11:39:37 AM

» Inflation's back? from Econbrowser
Does today's CPI release indicate that inflation has returned? [Read More]

Tracked on Oct 14, 2005 3:26:01 PM

» The Bond Market went Crazy from Everyone's Illusion
The bond market sold off today despite bond friendly news. It actually got below the critical technical (and psychological) 4.5% level for 10 year bonds. Aside from being technically very oversold, fundamentally the stage is set for a bit of... [Read More]

Tracked on Oct 14, 2005 11:05:12 PM


The joke in all this is that the only cheerleaders seem to be Wall Street. They don't want to listen to the fact that Main Street simply doesn't see or agree with what they are shoveling.

Wall Street keeps spouting this rhetoric of "low core inflation" and begging the Federal Reserve to stop raising rates. Main Street wonders what in the world possibly stops rising demand for things like energy or food or housing other than either higher rates (to choke demand) or less credit (to control speculation)

What ever happened to the idea that a good, old-fashioned nasty recession might actually do some good in cleaning out the excesses and weaknesses of the current economic situation? How, for example, do the bulls expect prices to go down if people still, through credit or "home equity appreciation" can still buy, buy, buy? Its nonsensical.

Take the medicine now so the pain later is not as bad.

Posted by: erikpupo | Oct 14, 2005 10:53:18 AM

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