New Column: The Street Gets Inflation Threat Backwards

RealMoneyI have a new column up at, titled  The Street Gets Inflation Threat Backwards.

It is an expansion of a few recent postshere:  Street Gets Inflation Exactly Backwards and Unemployment Levels and Labor Participation Rate.

Here’s an excerpt: 

"In my opinion, the majority of economists, strategists and financial media —
the full "punditocracy" — are exactly wrong on inflation. Indeed, I am
hard pressed to think of another item of such grave economic consequence that
most of the Street has so backwards.

The problem is, they are looking for inflation in all the wrong places. The
inflation (ex-inflation) crowd has managed to ignore robust price
increases across a variety of goods and services. Yet somehow they seem to have
found inflation in the one part of the economy where there is almost none:

One only had to see the market reaction to last week’s data on non-farm
payrolls, hourly wages and unemployment rate to realize how much the Street has
gotten its panties in a bunch.

The Federal Reserve is acutely sensitive to wage pressure — much more
so than to the commodity price increases we have seen over the past five years.
Maybe that’s why the FOMC quietly announced
that the upcoming meeting, previously planned for March 28, has been expanded to
two days. It will now begin on March 27. (I’m sure the extra day isn’t for more
time to welcome aboard Ben Bernanke.)

If the Fed falls prey to the erroneous interpretation of wages and jobs, we
could see a tightening cycle that goes far beyond what many on Wall Street
currently expect. And that would bode extremely poorly for market prospects,
both this year and next."

Regular blog readers will, of course, recognize many of the arguments in the column.


The Street Gets Inflation Threat Backwards, 2/9/2006 4:02 PM EST

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What's been said:

Discussions found on the web:
  1. Just a Bump in the Beltway commented on Feb 10

    Playing the Market

    Barry Ritholtz has an important post up today for those of you with assets in the equity markets: “In my opinion, the majority of economists, strategists and financial media — the full “punditocracy” — are exactly wrong on inflation. Indeed,…

  2. Andy Nardone commented on Feb 10

    Greenspan seems to think commodities are simply pricing in a huge terror premium based on his luncheon with Lehman’s big hitters. Seems like a lot of those runners are hitting bids with the dives in some of these commodities.

    This equity market seems surprisingly resilient from where I sit. Why fight the trend?

  3. brian commented on Feb 10

    Terrific analysis as always, Barry. Maybe Bush should have nominated you to the Fed instead of Bernanke. But then, of course, you probably couldn’t afford the pay cut. ;)

  4. Adam commented on Feb 10

    Hey Barry: Not that you need the help, but i defended you inre today’s RM spat at my site. Not sure what part of “I don’t support windfall taxes” they misunderstood, lol.

    I left SI in the nick of time, geez, where did all those clowns come from?

  5. Mr. Wonder commented on Feb 10

    Barry: These and complex decisions with serious consequences. What is Pres. Bush doing nominating a non-economist to the Fed? Is this guy another Brownie?

    Would appreciate your comment. And most importantly, would appreciate you bringing up this story during your next media appearance.


    Warsh’s Fed Nomination, `Out of Left Field,’ Draws Criticism, Confusion

    Feb. 10 (Bloomberg) — Most of President George W. Bush’s nominees to the Federal Reserve have earned accolades from across the economic and political spectrums.

    And then there’s Kevin Warsh.

    Bush’s nomination of the 35-year-old White House aide — a lawyer by training who would become one of only two members of the Fed’s seven-member board of governors without a Ph.D. in economics — has been greeted by criticism and bewilderment by some former Fed officials and economists. They point to his political connections and inexperience, and say the White House could have found a better-known, more qualified choice.

  6. royce commented on Feb 10

    I’m blown away by the wersh nomination. It’s like the White House no longer feels the need to even pretend appointments are about anything but political loyalty.

    Next we’ll see Bush’s favorite dentist appointed to Joint Chiefs of Staff.

  7. Mr. Knowitall commented on Feb 10

    Perhaps a better analogy is Kevin Warsh is to the Fed what Harriet Miers was to the Supreme Court.

  8. scorpio commented on Feb 10

    i know u defend Kudlow as a nice guy off-screen, but did u see him and that low-life steve liesman on tonite’s show both try to drown out Doug Kass for bringing up the CBO’s numbers about how much capital gains and dividends going to top 1%? and his simple point that median is more important than average? we really live in a one-party state. facts are to be hidden from the little people.

  9. muckdog commented on Feb 10

    I dunno, BR. I just don’t see the inflation. Energy prices are up, so I drive less, set the thermostat lower, and spend less eating out and at the stores. (Maybe I’m part the reason CAKE’s earnings are taking a hit!)

    And if we’re sliding into recession, why are semiconductor stocks so strong? They’re a tell on the future… JMHO, of course.

  10. Jordan commented on Feb 10

    Rising prices are a symptom of inflation. Inflation is essentially printing more money- what Greenspan has done excessively since 1994.

  11. ken commented on Feb 11

    1) The US government has an insatiable appetite for borrowed money.

    2) The US consumer has a negative savings rate.

    3) The S&P 500, as a proxy for all US businesses, is awash in cash. There is more corporate cash on the books today than ever before.

    So who is right? Is business correct that this is not a good time to be spending money? Or is the consumer right that money should be spent even if you don’t have any of it?

    The government seems to be on the side of the consumer. My bet is that the solution to the debt problem will be to inflate the problem away.

    Savings is for suckers.

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