Jobs Data is Irrelevant to Inflation

I hate to disagree with Jim Cramer on
anything (outside of Sports), but I believe he is incorrect
about the Fed regarding the jobs data.

The present bout of inflation is not being caused by wage pressure, tight
labor market, or even monetary conditions — and those are the items that
typically cause the kind of inflation the Fed can respond to. This time, a
combination of overseas demand for commodities is what has been driving prices
higher. Add to that a few isolated and unique sectors domestically: Health care
costs have exploded, education is much higher, gasoline has risen.

Except for Real Estate — obviously up in response to ultra-low rates — how
does Sir Alan plan to cool global demand? The really scary part to me is that I
have no idea what the Fed can do to about a robust China, Korea, Singapore,
India, Taiwan and maybe even Japan or Europe. I think the Fed is in a box of
their own making . . .

Now what?

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. anne commented on Apr 1

    There is little reason to think a significant rise in interest rates is needed to cope with an inflation threat, nor that it would answer to the problem if the really is an inflation problem building. Wages and benefits are not the issue, and the broadest price measures show little problem. Hmmm. Time for a chat on this :)

  2. anne commented on Apr 1

    Followed in JC’s steps, so to speak, by the way :)

  3. jjr commented on Apr 1

    Anne, there’s not an inflation problem building? What broad price measures show little problem? Not the hedonically adjusted numbers we get in the (yet still rising) CPI? Perhaps if global demand for raw materials slackens dramatically then price inflation will be curtailed, but that scenario is only likely to happen in the event of global economic slowdown. I agree that employment, wages and benefits are not the issue.

    The reasons why rising interest rates are necessary are twofold, in my severely limited understanding:

    1. To counteract the falling dollar. The dollar has nowhere else to go but down in light of US fiscal, current account, trade, etc etc DEFECITS. The Fed has little else left but rising rates to keep the decline in the dollar as orderly as possible.

    2. The Fed would like to get interest rates high enough to replenish their ammunition in case of another (looming?) recession or worse. There’s not much stimulative rate cutting which can be done from where they currently are.

    The whole inflation thing is a red herring.

  4. anne commented on Apr 1

    JJR

    There is little inflation worry from a long term perspective when the GDP price deflator is looked to. Near term, I hope the Fed is cautious and moves up slowly though Alan Greenspan at times has sought to get ahead of market expectations by acting boldly, to defuse ever more expectations of rate increases. I would hope the value of the dollar is of little Fed concern.

  5. Andy Nardone commented on Apr 1

    Were most of 2003 and 2004 an apparition? Did accelerated and bonus depreciation so distort the economy that we really don’t know the true underlying fundamentals? Were these financial incentives so great that firms made purchases that were not warranted for any reason other than the tax incentives?

    I think this might explain the drop off right after the New Year. If so, maybe global demand/inflation comes in right along with our economy. Sure China is a juggernaut for all of Asia, but its consumer class isn’t there yet. As we go, so goes China.

    My hunch is housing collapses of its own weight, low rates or otherwise. You are already seeing price reductions in areas, some bordering on significant.

    Greenspan – so overrated on the upside, so underrated on the downside. Retire the Fed along with him next year.

  6. anon commented on Apr 1

    putting aside the macro story for a second and trying to understand the relationshio to day to day movements of the markets, recent market activity has been focused on the stickiness of oil in the mid-$50 range, way above most of Wall Street long-term estimates ( until recently when all the johnny-come-latelies have now joined the bullish bandwagon) and the big story on accounting (again) in the insurance sector. The market is aware of the inter-relationships
    between the Financial sector and Insurance and looks worried. Since the market is usually a popularity and emotion driven vehicle day-to day, and CNBC has morphed into a semi Court TV being, daring people of concern to appear, it is not surprising to see this awful behavior. My suggestion would be to have Nancy Grace, from Court TV, be annoited a regular spot on Squawk Box. Mr. Ritholtz, it would seem your intermediate term bearishness may be rewarded.

  7. bear2 commented on Apr 1

    What is raising interest rates going to do ? How about cool consumer spending on H-O-U-S-I-N-G. Where do you think all of China’s exports are going ? Record number of new houses = record number of stoves, fridges, light switches, wiring, 2x4s, etc. I agree that China has strong demand, but raising the US interest rate would be a double whammy for them. Their exports to the US would slow down and that would slow down their own growth and thus demand for commodities.

    Mr. Ritholtz commented that there was a world wide spike in cement demand. on ROBTV. Wouldn’t cooling our housing market decrease the demand for cement ?

    I can’t wait for the housing bubble to bust. I think it has to be done sooner or later and I think that all our inflation problems are going to disappear. I don’t think there is any other solution to the current problem other than the prick the housing bubble.

  8. Ian Welsh commented on Apr 1

    You’ve got commodity inflation, but costs from commodity to finished goods are going down – so you’re getting a lot less inflation than you’d expect. Further with most of profits not going to wages, you have very little reason to fear wage push inflation (an overrated concept anyway.)

  9. frank commented on Apr 1

    where would the price of oil be if japan and europe hit an uptick in economic growth?

  10. james commented on Apr 1

    I dont think inflation has anything to do with any of this. Its all the 10yr. yield. The FED has induced major asset inflation. The only inflation we’ve seen is in the hard stuffs. The reason wall st. is having a coniption over rates is because the COST of their trades are going up, and they dont know how high it will cost them 6 months from now to put on a leveraged position in equities.
    I’m really starting to become interested by friedman’s call to abolish the fed. I dont know if I’d go that far, maybe just gag the chairman. The FOMC changed two sentences in its fed speak release last tues. Everyone knows how equities took it. Notice today was all about the debate about what the FED would do – not markets. Traders no longer interpret econ data as to what it may tell about the fundamentals of our economy, instead, they try to figure out how ONE PERSON will interpret and act on that data. It is my assertion that the FOMC creates more risk than actually exists when they try to “clarify” their motives.

  11. bear2 commented on Apr 1

    I think the FED is creating more risk too, because nobody ever knows exactly what kind of business environment we are going to have and what we have affects how we should act. Is it going to be “accomodative” forever ? Sure, interest rates are supposed to be neutral, but will that be “neutral accomodative”, “neutral restrictive”, “neural hard line”, etc.

    I don’t think that Greenspan has the spine to do anything other than to continue to feed the economy easy money. I think the housing bubble is going to continue to grow, consumers are going to continue to spend money they don’t have and the whole thing is going to blow up one day. Can an apartment in NY that gets $1900/month rent really be worth $1.2M ??? As long as we have interest only loans and unlimited credit, that will be fine. When things change, they will blow up.

    If you look at the stock market collapses in 1929, 1987 and 2000, they were all caused by easy credit and speculation. In 2005 the crash will be in housing instead of in the stock market.

    I keep wavering back and forth about jumping into the housing bubble. Maybe I should buy a few properties and flip them. If I know Greenspan was going to keep the real inflation rate less than zero, I would. It is not clear to me where exactly our economy is going.

  12. bear2 commented on Apr 1

    Oh… I forgot. I agree the 10 year yield is all messed up and I agree that when it changes there are going to be serious consequences. BTW: what happened the Asia balking at buying US bonds ? Have they reversed positions and now all is well with buying US bonds ? The US interest rate seems to have gone done although I didn’t hear Allan say that he was going to combat inflation with interest, nor did I see any sure signs of growth.

    Is Asia going to keep buying our bonds indefinitely ? Can we just run deficits forever with no adverse effects to the strength of our dollar and our interest rates ? I don’t think so. I think we are living in a dream world right now. I think we are going to have a hang over when we wake up. $50 oil and $2 gasoline will be the least of our worries. 15% interest rates and a flood of delinquent homeowners on their mortgages and Asia no longer buying our bonds might be the harsh reality.

    If someone can explain why this won’t happen, I’d sure like to hear it because right now it is bothering me on a daily basis.

  13. Barry Ritholtz commented on Apr 1

    Can I tell you how proud I am to see this kind of an intelligent discussion going on at my site?

    This is such a refreshing change from some of the less eloquent exchanges I have witnessed elsewhere.

    Thank you people — you warm my heart! You keep this up, and I promise to try to keep the quality of my posting up also . . .

  14. Karmakin commented on Apr 1

    Sorry to mess it up Barry:)

    I have an alternate viewpoint on inflation. Actually, it’s my alternate viewpoint on economics in general. Talking about economics in terms of formulas is one thing, but in reality, it’s just a huge number of economic decisions being made by a huge number of individuals.

    Meaning there’s cultural forces at work as well.

    The willingness to go thrifty, to keep away from the brands, to go price shopping. Hire wages/costs do decrease these things of course, as people’s time is worth money. But all this really does have a lot to do with prices, as it’ll have a vast effect on the effects of price competition to keep prices, and thusly, inflation low.

    Just to cut off the response at the past, there is a low-bar for prices, where at that point it doesn’t make economic sense for the seller/producer, and if prices are generally around that low-bar point, then increases in wages, costs, etc. can have a huge effect on prices.

    Yeah, you can’t make a neat formula out of it. But I think you need to accept the presence of some sort of cultural factor, and try to take effect into it in order to see the real story of what’s going on.

    A little change in the conventional wisdon of the masses can have a major effect on the economy at large. (For example, if the percieved values of stocks tomorrow dropped through the floor…what would happen?)

  15. The Nattering Naybob commented on Apr 2

    There is very little inflation and a whole lot a stagflation. And Uncle Al can’t do a damm thing.

  16. bear2 commented on Apr 2

    I think the housing bubble is the determiner in our whole economy.

    Right now the demand for housing stuff (ie stoves, fridges, plasma TVs, lumber, labor) is setting the whole demand curve for the economy and driving our import demand too. Furthermore the housing refis (or soon to be lack of them) is driving the liquidity side. As soon as the housing bubble burst and we start dealing with the aftermath, the sooner our economy gets back to normal.

    Would we really have record trading account deficits if our consumers weren’t boyed by the wealth effect of the housing bubble ? As far as I can tell, no sector other than housing is doing more than average right now.

    Bringing the housing bubble under control quickly is the key and I think that interest rates are the way to do it. Business profits are quite robust right now, except of course, GM and Ford. I think that Greenspan needs to stand up once in his term and give the market a surprize 1% interest rate hike and give a speach about how irrational the housing market it. Either that or mortgages need a special interst rate, ie 2% greater than what it is now, effective immediately.

    Yes, that would shock the market. So be it, and I’m a stock investor too. Here would be the benefits of an interest rate hike:

    a) speculation in the housing sector would stop immediately.
    b) refis would stop immediately
    c) there would be no more concern about whether inflation was in control or not. It would be.
    d) excessive consumer demand for commodities would come under control
    e) there would be no more talk about the weak US$ and foreign countries wouldn’t waffle about holding it
    f) the consumer savings rate might start going up
    g) consumer spending would go down
    h) it would help the trade deficit
    i) it is obvious from the yield curve that people don’t believe the interest rates in the US are going to rise. An immediate rise in interest rates would fix that !

    Another thing ARMs and interest only mortgages should be outlawed.

    We need to get the speculative character OUT of our economy. Whenever speculation is present, capital is being diverted from “real” business opportunities to phoney business opportunities. We’ve been in a speculative environment for 6 or 7 years now ! First it was the dot com stocks and now it is the housing sector. Maybe if we were putting our money into new car technology instead of housing we wouldn’t be so reliant on foreign oil !

    I realize that a one time interest rate hike might start a recession. What is the alternative ? Are we going to keep letting a housing bubble power our economy ? We all know that is going to blow up and the bigger it gets the worse the fall out is going to be. It isn’t like the economy is getting a lot better right now.

    For the last 3 years consumer spending has kept us out of a recession. That is great, but the consumer is all tapped out. Our businesses cannot continue to cater to a bankrupt consumer. Yes, I said bankrupt, because when (not if) the paper value of their houses drops back to something sane, they will have dramatically (or negative) net worths. Furthermore, when the interest rates rise (not if) they are going to have a lot less excess dollars to spend.

    Interest rates ARE going to rise, whether the cause will be from the need to curb inflation or to make our currency attractive to invest in or to stop speculation in the housing sector. A NY appartment fetches $1900/month rent, yet sells for $1.2M Doesn’t anyone see something wrong with this picture ?

    Greenspan: ARE YOU LISTENING ?

  17. anne commented on Apr 2

    Though I am sympathetic to worry about rapidly rising real estate prices, nonetheless prices fixing by interest rate changes would presume we know what housing prices ought to be and this is a tricky tricky problem at best. Long term interest rates are still remarkably low because institutional demand for such debt is high and supply somewhat limited. Investors are confident there will not be a long term inflation problems. I suspect that Alan Greenspan will ask for a 50 or even 75 basis point increase in rates as he has done before, if he feels the bond market is anticipating to many 25 basis point moves to allow for stability of prices for various asset classes. Trying to lower real estate prices is simply too dangerous; notice Japan.

  18. bear2 commented on Apr 2

    [quote]
    Though I am sympathetic to worry about rapidly rising real estate prices, nonetheless prices fixing by interest rate changes would presume we know what housing prices ought to be and this is a tricky tricky problem at best.
    [/quote]

    I’ve got 2 thoughts on this: a) long term house prices can easily be determined by rent/value ratios or house price/earnings ratios or even just a simple index to inflation. House prices should rise at the rate of inflation, may +1 or 2%, NO MORE. House prices are rising like they are because the carrying costs of the mortgage have been artificially lowered because of ARMs, interest only mortgages, Fed rates of 1% and anticipation of price appreciation at a rate greater than the interest rate.

    b) we don’t have to decide what the houses are worth, only prescribe a realistic interest rate. The interest rate we have right now doesn’t keep the economy in balance. There is no personal savings. The trade deficit is booming and consumer debt is way, way too high. I think that Greenspan has to add these criteria to his list of controlling inflation and keeping GDP going when selecting an appropriate interest rate.

    [quote]
    Long term interest rates are still remarkably low because institutional demand for such debt is high and supply somewhat limited. Investors are confident there will not be a long term inflation problems. I suspect that Alan Greenspan will ask for a 50 or even 75 basis point increase in rates as he has done before, if he feels the bond market is anticipating to many 25 basis point moves to allow for stability of prices for various asset classes.
    [/quote]

    Everyone is afraid to hold cash right now because cash as a negative real return and nobody perceives any risk with the bonds. As far as I am concerned, the risk premium on bonds is way, way too low these days. I do not understand why corporations are clamoring to buy debt these days. Furthermore, I think that GSEs should be outlawed. Would corps really be buying Fannie Mae debt if it wasn’t government backed ? This smacks of the junk bonds debacle in the 1980s ! I cannot understand how the risk premium can be 1% (3.75% – 2.75% for FED) on a mortgage to a highly leveraged consumer on a $400K house when the family earns $60K ??? Right now nobody is worried about default because the house is appreciating. What is going to happen when interest rates rise and the house price depreciates ? I think that the risk premiums on debt are going to come back to haunt everyone.

    [quote]
    Trying to lower real estate prices is simply too dangerous; notice Japan.
    [/quote]

    Either the FED can attempt to do or market conditions will do it for us. We are in the same position with housing that we were with the dot com stocks 5 years ago. Everything is the same: mass speculation, hysteria, presumption of profits, foolish wealth allocation, paper profits for investors (homebuyers), etc.

    The market bubble will end the same way that the dot com bubble did: CRASH. Can we continue to build a record number of homes year after year and not reach a surplus some day ? How can it be that employment income can rise at 1.5% a year and yet houses are rising at 25 to 60% a year. And those inceases are NOT localized, they are happening almost every where.

    I totally agree that the house price decline in Japan is regrettable. However it woudn’t have happened if there wasn’t over appreciation in the first place and the sooner you stop or limit that, the lesser the ultimate depreciation is going to be.

    As far as I can tell, we are too far into the housing bubble to avoid an unhappy ending. The only question is when are we going to shut the party down. The sooner we do it, the lesser the damage.

  19. bear2 commented on Apr 2

    BTW: great discussion !

  20. bear2 commented on Apr 2

    One more thing: I find it incredible that people are looking to the jobs numbers for signs of inflation. Let me explain something: USA has product demand driven inflation. The prices of those products are going up because the commodities that are used in them are becoming short in supply. (oil, copper, zinc, steel, etc.) We will NEVER see job inflation because we are IMPORTING the products that we are buying ! Look at our trade account numbers !

    I don’t know what to call what we are going through right now, but we are getting inflation in the stuff we buy, but no corresponding inflation in our jobs. This is a scenario under which we become relatively poorer ! We continue to work as we are, earning our US$, but the things we need are produced off shore, creating jobs for China and the rest of Asia, our dollar becomes weaker and weaker and the price of the things we buy goes up and up because the commodities aren’t there to make them with.

    We’ve created inflation in other countries which was Barry’s initial argument.

    Greenspan can look at employment numbers all he wants for inflation, but it isn’t going to show up there. What he needs to look at is the prices of copper, zinc, steel, cement, etc and the goods we buy.

    The other real place to look for inflation is in the debt level of consumers. Consumers aren’t increasing their spending because of wage increases or working more hours. They are increasing their spending because they are borrowing more. Looking for inflation in employment earnings increases was something that made sense in the 1970s because people still lived a financially responsible life back then. Today, you have to look at consumer spending levels versus income INCLUDING energy and house carrying costs at a reasonable long term interest rate, not an artificially low interest rate.

    I think that Greenspan intended to put the US into a new era of inexpensive money, where the long term FED rate was 3%, eliminating a 6% interest tax on businesses. The only problem with that is it doesn’t penalize the debt users enough (in this case consumers) to ensure that capital is wisely spent.

    Like I said in my first post, HOUSING is the root of all our problems.

  21. bear2 commented on Apr 2

    I’ll shut up after this: “during the Japanese bubble, they had 100 year mortgages that were inter-generational.”

  22. rl7543 commented on Apr 2

    All I know is that I see inflation every day when I drive by the gas stations on my way to work. Today (Saturday), I worked a half day. The lowest priced and the highest priced gas stations that I pass both raised their prices from 8am when I went in to work until Noon when I left work. The lowest priced gas went from 2.08 to 2.13 per gallon and the highest priced gas went from 2.15 to 2.19 per gallon.

  23. anne commented on Apr 2

    Fine discussion. I am thinking carefully about the argument, for there is much that is novel about the mix of conditions.

  24. Dave commented on Apr 2

    Barry –
    Off topic here, but just wanted to post a comment about how much I enjoy your writing. I really like the Technical Analysis stuff, about support levels in the indices, trendlines, historical patterns, etc. I usually check in every day.

    Question for Barry/all: do any have an opinion on gaps on charts? I’ve done some analysis of different stocks, and it seems like 80% of the time (just a rough guess) any time a stock gaps up a large amount from the previous day’s close at the open, it tends to drop back and fill in the gap. Sometimes it does it the next day, sometimes takes months, but they almost always fill.

    Here is an example, Dell. Had a gap back in Nov. 04, heavy volume, well it just finally filled it:
    Dell Chart at stockcharts.com

    Great Blog – Thanks!

  25. bear2 commented on Apr 2

    There are some very interesting articles and comments on this website: http://thehousingbubble.blogspot.com/

    Specifically, a politician just publically announced that the Fed isn’t going to do anything about the housing bubble.

  26. anne commented on Apr 3

    When we use the term housing bubble, we assume we know that there is a housing bubble. But, how is the Fed to know if this is so and just when did a robust housing market become a bubble and when should the Fed have acted and how? Price regulation by monetary policy is very very very tricky, and we should think of Japan in this regard.

  27. bear2 commented on Apr 3

    If it walks like a duck and it talks like a duck, then it is probably a housing bubble…

    I don’t know how you would put a measure on the bubble, but I think the number of people that would argue its existence are falling rapidly.

    How do you say when there is a stock bubble ?

    – rampant speculation
    – great trading ratios
    – assets not supported by fundamental market conditions
    – reliance on “A greater fool than me” to gain a profit
    – huge demand for new issues, ie homebuilding and IPOs.

    As I said before, you don’t have to decide if there is a bubble. Just adjust home mortgage rates and qualifications to something reasonable and let the market decide if a house in California is worth $600K.

    The easiest way to accomplish this is to hike short term interest rates and to make a 20% down payment mandatory or something similar. I think that would take care of all housing gains in short order. No pun intended. I’ll bet you would only have to hike rates for a few months and suddenly we wouldn’t have an inflation problem anymore. If housing IS robust and properly priced, it would easily withstand an interest rate of say, 8%.

  28. Jim Rapp commented on Apr 3

    Greenspan pumped up international demand by hyper stimulation of our consumer economy during the Asian Crisis. He will probably have to go to an equal and opposite extreme to chill our consumers sufficiently to cool off global demand now.

    Europe will chill on its own. Japan is hanging on by a thread. China, on the other hand, supplies Walmart, whose sales seem unaffected by our economic cycles. China’s big worry is the dilemma of inflation versus floating their currency.

    Our biggest worry ought to be that if we successfully chill global demand, who will buy our treasuries? If foreign central banks diversify and have less to invest overall then our treasures fall and yeilds rise. The rise in yeilds further depress consumer demand which further reduces foreign central bank treasury appetite,,,, with this snowball going nowhere good. This while we face a Social Security mess from baby boomers hitting the fund and likely falling tax receipts resulting from a slowed economy. A mess. A mess complicated by a potential housing bubble burst if long rates climb as a result of this snowball.

  29. thomas riccardo commented on Oct 14

    U.S. inflation is on a runaway course at present.
    In Tampa, the average house has increased 30 present the past year, Electricity prices have increased 12 precent, Storm water fees 200 percent, food prices overall 7 to 8 percent, education costs 14 percent, healthcare costs, over 10 percent with large deductible/copayment increases, Land taxes increasing with the value of the homes, house insurance increases over 20 percent, Gas prices 50 percent, should I continue.
    And the wages are stagnant, so what will Give? Is there a reason why the U.S. dollar is lower then the Eurodollar? Could that be inflation over real economic growth and vast sums of debt?
    For every 1 dollar produced in the U.S. economy we have over 5 dollars in new debt so where is the economic growth? All we are doing is going into debt at an alarming rate.
    Over 40 trillion in debt when including the current account, Government, private and corporate debts.
    And on top of that we have huge liabilities starting in 2008 concerning the Medicare and S.S. which will go sharply into the red when the babyboomers start to retire in large numbers.
    We have by far the largest debts in the world and it continues to rise rapidly.
    It just amazes me that people in this country are blindly repeating everything they hear on the T.V. and from the Magazines/Newpapers.
    Where is the common sense?
    WE are becoming a sharecropper society indebted to Asian and European Interests. Nothing more then a Colony, the way the country started many years ago from Freedom to inslavement!

Read this next.

Posted Under