Core Prices versus Non Energy Earnings

Cpi_exOne if the more amusing aspects of data analysis is watching the way various persons (of the genus Mustela nivalis) manage to emphasize what they want and ignore the rest.

Case in point: Core CPI/PPI ex food and energy.

Apparently, we have no inflation in this country . . . unless you count food and energy, in which case we have alot of inflation.

The whole concept of reporting CPI ex-food and energy is to pull out the volatile figures to provide insight into the underlying strength of inflation. You could also use a simple moving average, or even better, the trend.

Instead, we see an entire group of pundits who have chosen to ignore the energy component — not to eliminate wild swings, but simply to create pretty world where inflation is low (and where all the children are above average).

Yet at the same time, these same pundits are all too happy to report that year over year S&P500 earnings for the quarter are up 12%, including the contributions of Energy sector. That’s inconsistent.

Why? Without Energy, the SPX year-over-year quarterly earnings gains are a pathetic 4%. With Energy, they are robust — but so, too, is inflation.

Choose your poison:  Either we have robust inflation, due in large part to Oil (but also due to industrial commodities, food, and health care) or we have pretty lousy earnings.

But if you believe you can have one (great S&P earnings thanks to the Oil Sector!)– but not the other  (hey, no inflation ex-energy!) — and then you position your asset holdings accordingly, you are just begging for the market to administer your portfolio a spanking.

Its one or the other — but not both . . .


Chart courtesy of NYT

What's been said:

Discussions found on the web:
  1. royce commented on Aug 17

    Another spin you often see is that energy doesn’t matter to the U.S. economy any more now that we don’t do as much manufacturing as we used to. Yet one has to ask, somebody is manufacturing all this stuff we buy someplace. Who’s picking up the costs of increased energy prices from them, the consumer or some kind of magic offshore energy fairy?

  2. spencer commented on Aug 17

    Actually, if your portfolio is extremely overweighted in energy you would want to emphasize the high inflation data and other things that would push up rates since oil stocks generally outperform when inflation and rates are rising.

  3. scorpio commented on Aug 17

    let’s see: annualizing July’s numbers consumer CPI rising at 6% and PPI rising at 12%. can u say “accomodative”?

  4. marku commented on Aug 17

    Yes, but without energy inflation, we would already be in the in the Fed’s dreaded deflationary liquidity trap…..

  5. Jordan commented on Aug 17

    Kudos to Barry for this piece. Eating and driving dont matter you know? Think about what the average person does every day. They eat 3 meals, use the electricity in their home, drive to work and back. Food and energy are vitally important and to have commentators exclude them altogether is an ominous sign (from a sentiment viewpoint) for the markets.

  6. frank commented on Aug 17

    I’m not an economists and read this blog partly to help overcome my ignorance of these issues. Concerning the inflation issue where the article focuses on food and energy as where inflation is occurring; why is not the startling increases in the price of houses not inflation and not included in these calculations?

  7. sw commented on Aug 17


    Because the housing portion of inflation data is calculated using whats called “owners’ equivalent rent”. Instead of using the change in the value of a person’s house, the change in the amount it would cost to rent that house is used instead. Why this is done when 70% of the country owns their home is a mystery to me.

  8. Larry Nusbaum commented on Aug 17

    This is not complicated! There is no inflation……..provided I don’t eat and don’t drive!

  9. nate commented on Aug 17

    People can substitute on some things like food to cut costs and avoid prices (grow and plant food, can food, bake, etc). People can go to Aldi’s.

    It may be more difficult to substitute from oil&gas into less expensive alternatives.

  10. Jebs House commented on Apr 14

    I’m not sure what the hold-up is… maybe they have re-thought their stance on how this is going to actually make the company any money. Or perhaps their lawyers pointed out the liability of providing agents a platform to stick their feet in their mouth. Whatever it is, it’s hardly something I’d claim as being “Well done”.

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