Inflation’s Demise Has Been Exaggerated

Similar to Twain’s observation, reports of inflation’s death
have been greatly exaggerated. Despite tales to the contrary, it is alive and
well and making itself broadly felt. Indeed, we believe that inflation has been
vigorous for the past 3 years, and goes far beyond food, oil and natural gas.

That is, unless you rely on BEA headlines. We have long
lamented that the adjustments taken to arrive at a core CPI is one conveniently
bereft of increasing prices. These systemic modifications only serve to obscure
the actual inflation occurring in the economy. Friday’s CPI data was no
different. For readers who prefer their economics without artificial
sweeteners, we revisit this issue today.

Post-bubble, -recession and -9/11, the entire purpose of
unprecedented government stimulus has been to massively re-inflate a
flat-lining economy. At this, the government has succeeded all too well. Far
too many commentators insist that only Energy is going up in price; This canard
is belied by the data, and by your everyday experience.

The core rate has inflated significantly –
BLS data be damned. To wit:

• Commodities: The CRB Index has spiked since 2002. This move is roughly equivalent to
1976-77 increase. The late 70s inflation spike came on top of the 1972 move, so
perhaps we should consider ourselves fortunate-so far; Nonetheless, CRB has been going higher for 4 years.

• Health Care Expenses: Have been going significantly for
nearly a decade. Anecdotally, health insurance premiums have been rising 15%
annually. (How much has your own firm’s premiums run up? Next case);

• Precious metals: have moved higher, with Gold at
multi-decade (18 year) highs. We take rising Gold as a sign of inflation.

• Education: Anyone who isn’t employed by BLS knows
painfully well that tuition and textbooks have skyrocketed;

• Housing: Housing affordability is at a 14 year low,
despite mortgage rates still relatively cheap at 6%. Don’t look for this factor
in CPI, as the BLS model uses something known as Owner’s equivalent rent –
astonishingly, OER has actually fallen as home prices rose due to a rental
glut. (See nearby chart)

It hardly needs to be stated that if Inflation appears
robust in BLS data, then the many entitlement programs with COLA adjustments
will cost significantly more than the nearly 2/3rds of the Federal Budget they
consume at present. Given the precarious state of Uncle Sam’s finances, the
motivation for understating inflation is apparent.

However, unless investors
fully understand the risks which actual inflation presents to their equity and
bond portfolios, they may find themselves more reliant on entitlement programs
than they ever expected to be.

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  1. Dave Singer commented on Oct 17

    What does the Media’s/Governments missing of the boat on the above facts mean for the Markets in the future… We’ve already had some easy picking downside in retail/real estate…and more recently the rest of the bunch…What of the money mangers pundits gov officials you can see on CNBC (if you watch) who seem to adhere to a Bullish philosophy @ this point…Are they hoping in order not to get crushed or are they simply the otherside of the trade which is necessary to produce even further downside when in fact the weakness of the scenario is finally realized…..In other words, regardless of any near term bounce off this decline..Shouldn’t it be obvious to anyone paying close attention that we are in for more downside???

    I mean while “everyone’s” been crying about how bad the market is and how the hurricanes will spur growth, etc etc….I’ve done the best I ever have on the short side…After all, the dow was @ 7500 three years ago, and is appears tired here…in addition to the myriad problems in the world slash/government propoganda and mismanagement…

    Holla Back



  2. David Silb commented on Oct 17

    Well the only thing I can say is if you really listen to CNBC you may be disappointed. In my experience they are just looking for something to show viewers. My best advise is not to watch. It might only confuse you and they may reverse their positions without any real explanation. Best to find a better source of info. Remember its television, part of the game is to entertain.

    Hallelujah!!! I read that article on “The Illusions of Hedonics,” thank you. I knew the CPI, nominal GDP and real GDP always felt screwy. I especially love the part about “true price,” where an official at the BLS ponders whether a good or service modified really provides “pleasure.” Wow, next time I use my microwave with the rotating discey-thingy in the middle to make popcorn, I’m gonna try to measure how much pleasure I receive.

  3. howard commented on Oct 17

    me, markets do make mistakes, and sometimes for lengthy periods of time, but in the end, they correct.

    at this point, it’s actually hard to imagine that anyone is buying a 10-year government bond because they truly believe (as the TIPS market tells us) that in october, 2015, we’re going to look back at 2.5% core inflation (putting aside definitional issues) for the precedeing 10 years. The bonds are being bought to match pension liabilities, to hedge positions, to underwrite export strategies, and all sorts of other extrinsic reasons.

    which means that the opportunity, of course, lies in shorting bonds.

    now, is our host right or wrong? if i knew that, i wouldn’t be wasting my time sitting around posting blog comments….

  4. Norman commented on Oct 17

    These housing rejiggers are all pretty superficial in that interest rates, taxes etc are not taken into account. 30yr mortgage rates have stayed flat this last year but how about over the years? How about adjustable rates? Where I live house prices have increased by 10% per year over 20 years but mortgage payments have only gone up by 5% per year due to decling interest rates.
    But even more than this, if increased house prices are to be factored in they only effect those who have purchased these houses. For the rest of the people (95%?)house price increases has not been accompanied by more expenditures,
    except, maybe, for taxes.
    More light and less heat, please.

  5. Barry Ritholtz commented on Oct 17


    This doesn’t happen all that often, but the person you responded to was so ill behaved and foul mouthed that their comments were deleted. They have since been banned from TBP. (No, I haven’t had them banned from all of typepad — but if they want to play some more, I’m game).

    I very rarely do this — I encourage debate, all different points of views, even tolerate trolls — but I have zero patience for total jerks.

    Hey, thats the advantage of being a benevolent dictator.

  6. D. commented on Oct 18


    That’s the point. .. The economy moves at the margin. If 5% (it’s more than that because the vast majority of homeowners have refinanced in the last few years and something like 40% have used their house as an ABM) made the real estate market move up, imagine what 5% could do in financial distress.

    Maybe the housing market won’t collapse but the economy could suffer. If housing prices stop going up, a 15K kitchen might seem more reasonable than a 30K one. I shopped for a house in 2001, before the real estate market really took off. It’s amazing what people will tolerate when they don’t see a payoff… and I’m talking about an upscale neighborhood!

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