Look Ma, No Inflation!

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.

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What's been said:

Discussions found on the web:
  1. erikpupo commented on Oct 14

    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.

  2. john commented on Oct 14

    another article on increasing inflation….

    Measuring inflation

    Pricing the future
    Oct 13th 2005
    From The Economist print edition

    The cost of living has been increasing faster than you thought

    FIGURES due on October 14th are expected to show that America’s 12-month rate of consumer-price inflation rose above 4% in September, to its highest since 1991. Yet in recent years, this gauge may have understated the true pace of increase in Americans’ cost of living. The problem with conventional inflation measures, such as the consumer-price index (CPI), is that they measure only the prices of goods and services consumed today. But because people live for many years they also care about the prices of what they will consume tomorrow.

    In a new paper, Ricardo Reis, an economist at Princeton University, has attempted to calculate a “dynamic price index” (DPI) for the United States, which takes account of future as well as current prices. Unlike the CPI, it includes the prices of shares, bonds and houses. Assets are claims on future goods and services, and so asset prices reflect the price of consumption in the future relative to the present. If share or house prices rise sharply, future consumption becomes more costly, and so the cost of living increases.

    To illustrate his calculations, Mr Reis takes somebody approaching retirement who has a given amount of money to live on until he dies. He then calculates by how much the retirement fund must be adjusted each year to allow the person to afford the same standard of living given changing prices.

    Over the past three decades as a whole, Mr Reis’s DPI has followed a similar downward trend to the CPI. But in recent years the gap between the two has widened. In the four years to 2004, the average annual rate of inflation according to the DPI was 7.4%, compared with an average increase of only 2.3% in the CPI. This was largely due to the rising price of homes. The true rate of increase in workers’ cost of living is calculated to be just as high. Still feeling as well off as you did?

  3. brad setser commented on Oct 14

    nice post — absence of real wage growth is what worries me. housing ATM ain’t gonna work the way it used to.

  4. Abnormal Returns commented on Oct 14

    Inflation rears its ugly head

    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?

  5. Joshua commented on Oct 14

    “The only real bright spot in the inflation data is “Worker earnings relative to inflation.”

    Deflating wages caused the 1926 General Strike in the UK (the nearest Britain has come to a civil war in modern history) and were the harbinger of a very deep and prolonged recession.

    Apart from during the Great Depression, is there any other time since when wages in the U.S. have actually fallen in real terms?

    (BR: That was my too subtle sarcasm)

  6. CalculatedRisk commented on Oct 14

    Fun CPI numbers (over last 12 months):

    All items 4.69%
    Energy 35.14% (no surprise)
    Medical Care 3.93%
    Food 2.52%
    Shelter 1.95%

    Thank goodness shelter (the largest component) is holding CPI down.

  7. Tim commented on Oct 14

    When our favorite CNBC star, Mark Haynes, once again remarked on the stupidity of “core” inflation, Economist Drew Matus commented, “We’re talking economics here, not common sense”.

    More here:

    Inflation, Interest Rates, Game Theory

  8. Norman commented on Oct 14

    1) CPI is intertwined with Core. It seems logical that when energy prices are skyrocketing the ‘core’ inflation would be subdued as more consumer money is going to energy, less to ‘other things’. Thus, the ‘other things’ have less price pressure. When energy moderates those ‘other things’ will go up.
    2) Greenspan and The Big Picture seem to think that subdued wage increases are good. I don’t know how Greeenspan gets away with this description while in front of Congressional committees. Where are the Dems? This country is based on the average guy-gal increasing his-her standard of living. If that doesn’t happen we are not living up to our ideals.

  9. Abbi Vakil commented on Oct 14

    A lot of problems w these hedonistic adjustments to the core components do not take into account lack of cheaper alternatives. So I am getting much better health care for my money now, therefore it is cheaper from CPI perspective, but it still costs me the same (if not more) out of pocket. How to reconcile the 2?

  10. erikpupo commented on Oct 14

    Here is a retail sales nugget for you:

    Sales at gas stations were up 4 percent last month. However, much of that increase reflected the surge in pump prices rather than increased volume.

    If gasoline sales were excluded, sales at all other retailers actually fell by 0.2 percent in September.

    GREAT, so Wall Street lies again, saying retail sales were wonderful. HELLO, it was because sales of gas were up due to higher gas prices.

    Barry, do you think the Fed sits and chuckles at the Wall Street economic response to these reports?

  11. Lord commented on Oct 14

    Rapid housing appreciation has held rents low for some time now as people opt to buy, but now that appreciation is slowing, expect rents to climb for several years.

    Medical care price increases are mostly attributed to quality. Personally, I think quality has actually been falling but this is not being picked up. Soon we will all have to travel to some third world country for some affordable ‘low quality’ care.

  12. Tim commented on Oct 14

    Does anyone else suspect that when housing cools and rents start rising (perhaps dramatically), that housing prices will somehow make their way back into the CPI calculation?

    Note that Social Security recipients got a 4.1 percent raise for the year – an average of $39 per month to cover rising energy and medical costs.

  13. Econbrowser commented on Oct 14

    Inflation’s back?

    Does today’s CPI release indicate that inflation has returned?

  14. spencer commented on Oct 14

    Joshua — real average hourly earnings fell:

    1974 -3.5
    1980 -6.1
    1990 -2.3
    2005 -2.4 so far.

    Note that each of these drops was associated with a

    Of course real average hourly earnings are now $8.05
    as compared to $8.16 in jan 1967 when the series starts.

  15. David Silb commented on Oct 14

    Well I live in Miami. The Condo market has been on fire down here for the past several years (This you probably know.) So much so that developers are planning to bulldoze office buildings and replace it with Condos. Rational: office space rents roughly $33 sqft, condos sell upwards of $200+ sqft.

    My pondering is this. Does anyone think its better to build speculative properties that displace wage paying businesses? If businesses are displaced not because of perceived growth in population or replaced by more competitive businesses, but completely for speculative reasons then am I wrong in thinking a major bust is in the offing???

    And if my thinking is right what will that do to the markets if the bottom falls out of the real estate market? (right now I don’t know how to define the bottom falling out.) Mr. Greenspan says the economy can weather the fall, but that was before Hurricanes Katrina and Rita.

    And most people buying said spec properties are using 5yr A.R.M. mortages (which I think you only pay interest during that time before a ballon payment.) Some of these ARM’s are close to maturity.

    I see this as further proof that the economy is on the edge of a slide into (I don’t dare say it out loud I fear the Gremlins might hear me.)

  16. Lord commented on Oct 14

    I would be surprised if many businesses are displaced by tearing down office buildings. Office building vacancies usually start at 15% and reach 25% in saturated markets as opposed to a more common 5% in residential buildings. CB Richard Ellis keeps stats on these in various markets, at least for large developments.

  17. Mark Sullivan commented on Oct 14

    “It seems logical that when energy prices are skyrocketing the ‘core’ inflation would be subdued as more consumer money is going to energy, less to ‘other things’.”

    What happened to core inflation after the 1970’s oil shock? Did it go down as oil prices rose?

  18. D. Wallener commented on Oct 14

    CRB is finally back to where it was in 1981. That’s 2 and half decades producing virtually no net change in commodity prices.

    What inflation?

    As I recall, the CRB ramp leading to the 1981 peak happened right before the economy took off like a freakin’ rocket. Ditto for the ’96 CRB ramp-o-rama, which lead into the unbelievable late-90s boom times. Both those ramps were of essentially the same size as the one we’re currently in.

    BR: No net changes in commodity prices? Are you kidding me?

  19. Everyone’s Illusion commented on Oct 14

    The Bond Market went Crazy

    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…

  20. Kim Lyvang commented on Oct 14

    In the sixties the economy ran the stockmarket.
    Now the stockmarket runs the economy.
    Greed is overtaking our lives.

  21. Les commented on Oct 16

    “A lot of problems w these hedonistic adjustments to the core components do not take into account lack of cheaper alternatives. So I am getting much better health care for my money now, therefore it is cheaper from CPI perspective, but it still costs me the same (if not more) out of pocket. How to reconcile the 2?”

    The improvements in quality in a good or service should lead to a measurable reduction in demand in another good or service and therefore lower prices that can be measured elsewhere. For instance, installing running lights and air bags as standard equipment on automobiles should reduce automobile accidents and result in measurably lower costs for automobile insurance and medical care. It would appear that applying the quality adjustment by lowering the vehicle’s price is essentially double-counting the benefit to society.

    In addition these improvements often have a profit margin built in for the producer and the retailer. One should be careful in incorporating such mark-ups as benefits accrued to the consumer.

  22. Brian commented on Oct 16

    For the majority of Americans already in the housing market, their housing “cost” can be conceived of as the sum of current outlays (mortgage interest, taxes, etc.), opportunity cost, and present value of changes in terminal value. Holding the first two constant, an increase in the terminal value will decrease the current cost. In other words, despite the flaws in the CPI calculation so well documented here, the increasing estimated terminal value of owner occupied housing may in fact be reducing the implicit current cost of housing.

    Obviously, this only holds for those already in the housing market. The terminal cost for an existing owner become the initial cost for a new owner, which affects the new owner’s current cash outlays and opportunity cost. Unlike a permanent decrease in price caused by improved technology or productivity, this price effect will be cyclical, as will the side effects (such as the low savings rate).

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