The Street Get Inflation Exactly Backwards

Monday, February 06, 2006 | 02:35 PM

One of the odder aspects of analyzing the economy and capital markets comes when you reach a significant disagreement with the mainstream view of things. This includes the punditocracy of economists and strategists, as well as the financial press itself. And while I am wrong so frequently that I have come to expect to be, I do manage to get something dead on every now and again.

There is a special kind of joy – not quite schadenfreude – reserved for those rare occasions when you are exactly right and everyone else is precisely wrong. That has been the case with Inflation. I am hard pressed to think of another item of such grave economic consequence that nearly the entire street has precisely bass ackwards.

In 2001/02, the economy was essentially flat lined. Tax cuts hadn’t helped, spending down the surplus was of no avail, nor was the War in Afghanistan. It wasn’t until the Federal Reserve made a concerted effort to “Reflate” the economy by cranking up money supply and radically lowering rates that the economy started moving again.

The Fed was successful. As I wrote way back in December 2002: “In the present disinflationary environment, the spike in [gold] suggests that the Fed's maneuvers have – finally – started to gain traction. If their priming of the pump is sufficient to spike gold, the implication should also be that increased liquidity and credit should be sufficient to initiate economic growth – and market gains.”

The prime risk from artificially reflating a post-crash economy is Inflation. “As ye sow, so shall ye reap:” And that is precisely what followed the Fed’s planned reflation. With the exception of wages, prices for just about everything else have risen: Homes, Oil, Precious Metals, Food, Construction Materials, Natural Gas, Industrial Metals, Education, Transportation, Medical Care, Coal, Insurance, etc. Pretty much any good or service you can consumer costs more today than it did three months or three years ago.

Excepting, of course, real wages and income.

How has the Street managed to get this so wrong? Part of it is due to completely misunderstanding the reason to report core CPI ex-energy. As we have written (all too repeatedly), removing a volatile component from a single month is sensible when an event gives cause (i.e., hurricanes). But with the overall trend for the CRB index has been up for 51 consecutive months, the ongoing reporting of inflation ex-inflation is nothing short of sheer idiocy.

As to that 4.7% Unemployment Rate: it was only so much more NILF: The BLS reported in January that as the overall population grew, the “civilian labor force” itself got smaller. Its not that the  numerator is getting larger; rather, its that the denominator in the unemployment fraction is getting smaller: 4.7% (7,040 / 150,114 = 4.689%).

Wage pressure? Hardly – it’s nothing more than basic arithmetic.

Monday, February 06, 2006 | 02:35 PM | Permalink | Comments (13) | TrackBack (1) add to | digg digg this! | technorati add to technorati | email email this post



TrackBack URL for this entry:

Listed below are links to weblogs that reference The Street Get Inflation Exactly Backwards:

» Stimulus compared in two economic cycles. from BOPnews
Barry argues that the economy didn't get going until the Fed got serious. The inflationary point of "core" CPI should be killed dead by a simple graph, which we hereby reprint: Note how sustained spikes of CPI over CPI core... [Read More]

Tracked on Feb 6, 2006 5:27:59 PM


Barry: how do we email you good stuff ?

Compare these two charts and tell me what is going to happen. Is crude over priced or is gasoline underpriced ?

The first time that gasoline hit $2.10, oil was at $35/bbl.

Posted by: me2 | Feb 6, 2006 2:51:38 PM

The comments to this entry are closed.

Recent Posts

December 2008
Sun Mon Tue Wed Thu Fri Sat
  1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31      


Complete Archives List



Category Cloud

On the Nightstand

On the Nightstand

 Subscribe in a reader

Get The Big Picture!
Enter your email address:

Read our privacy policy

Essays & Effluvia

The Apprenticed Investor

Apprenticed Investor

About Me

About Me
email me

Favorite Posts

Tools and Feeds

AddThis Social Bookmark Button

Add to Google Reader or Homepage

Subscribe to The Big Picture

Powered by FeedBurner

Add to Technorati Favorites


My Wishlist

Worth Perusing

Worth Perusing

mp3s Spinning

MP3s Spinning

My Photo



Odds & Ends

Site by Moxie Design Studios™