And so it begins . . .

If ever I were to go on a murderous, cold-blooded rampage, killing God knows how many, only to be gunned down by the police in the act, someone, somewhere will surely ask "Why did this happen? What could have set him off?"

Were that to ever happen, dear readers, I want you to point to this recent article (from Reuters) as the prime causative factor:

"Federal Reserve officials scrutinizing the latest inflation numbers are facing an inconvenient truth — all of them have risen…

In a study released this week, the Dallas Fed noted that the fraction of components experiencing annualized increases of more than 3 percent had grown to 57 percent, from 33 percent in December.

The findings, presented in chart form, argue against the idea that gains in a measure of housing costs — or owners’ equivalent rent — have had an outsized impact on inflation that masks a less-menacing underlying trend.

"Rather than identifying a single component to blame for the recent pickup in core inflation, chart 5 suggests an explanation more akin to the resolution of Agatha Christie’s ‘Murder on the Orient Express’ — they all did it," it said."

So far, I am in agreement — we have seen inflation a variety of components across the board. Housing is an important component of inflation, not to be ignored. Also of note, the assinine habit of stripping out Energy and Food, which the author of this piece specifically details:   

"The practice of focusing on inflation without factoring in food and fuel has its critics, not least because such purchases make up an important part of the household budget and deserve consideration if they keep heading higher.

As a result, there are other semi-official measures of inflation that try to exclude volatile components in the inflation basket, while avoiding any systematic bias.

So far, so good. We now lead up to the root cause of a potentially murderous rampage.  Here’s the latest bit of stupidity, which actually defies my ability to describe it without breaking down into a sputtering rage:

"Prices have risen more in the past three months than in the preceding three months, regardless of whether owners’ equivalent rent is included or excluded," noted economists at Goldman Sachs in a recent note to clients.

The U.S. Labor Department is tinkering with an experimental price gauge that strips out owner-occupied housing costs to offer an internationally comparable inflation, according to a study released this week." (emphasis added)

Before I put in my order for armor piercing bullets, perhaps cooler heads will prevail. Thank goodness for this chart, via Birinyi Associates, that puts the cost of housing into context of other inflationary items: 

>

click for larger graphic

Cpi_comp

courtesy of Birinyi Associates
>

The chart makes it readily clear to anyone but the most pigheaded bureaucrat or partisan advocate that housing is the single largest component of inflation over the past 6 years. This is most likely due to two key factors:

1)  Housing is typically the largest item in a household budget — far larger than food or energy;

2) Rates cut to half century lows sparked the biggest housing run up seen in decades.

Hence, it readily apparent (at leats to those who can see) that over the past 6 years, inflation was actually far greater than official government reports claimed it to be.  The blame for that is Housing, and the mechanism for under reporting it is the Owner’s Equivalent Rent.

After this 6 year lapse, the present tinkering appears to be little more than another attempt at reporting Inflation ex inflation
>

Ok, I feel better now. Crisis averted . . .

>

Source:
U.S. inflation gauges are all pointing upward
Alister Bull
Reuters, Thu Jun 29, 2006 1:41 PM ET
http://tinyurl.com/ppjhv

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What's been said:

Discussions found on the web:
  1. Bob commented on Jul 25

    After watching the Fed’s explain away the historic increasing in housing prices using the bogus “owner’s equivalent rent” scam, I was wondering what would happen when the shell game ended. No we know. Why isn’t anyone else talking about this? Can I join you on your rampage?

  2. jab commented on Jul 25

    Damn Barry – Chill Out

    There is nothing wrong with striping out stuff that goes up in price. As long as the bond market continues to buy the number and not figure out what we are doing we can finance our national debt at a long term interest rate that is LESS than the real inflation rate. We all benefit from this – I do not see your bloody problem with this!

  3. The Hube commented on Jul 25

    Looking at that chart leads me to the only logical conclusion: Shortly someone will come up with a guage of inflation excluding food, energy, housing and medical costs.
    Wouldn’t it be easier to just say inflation is zero excluding all changes in prices. That way there would never be any surprises.

  4. Uncle Bob commented on Jul 25

    How else do we eliminate that 41 Trillion in future entitlement obligations if we don’t eliminate that inflation escalator? Surely at this point in your life you don’t really still believe in Santa Claus.

  5. Eric in Santa Fe commented on Jul 25

    The question going forward is … Is this particular variety of inflation treatable with hikes to the Federal Funds rate? We have a lot of experience fighting inflation that comes from wage-price spirals, but the wage component that we usually see driving inflation is entirely absent.

    Today’s inflation comes, in a large part, from energy costs, and the price of energy has more to do with increased demand in other countries and supply disruptions. I’m not convinced that domestic interest rates can do much for that factor.

    The only thing similar to a wage-price spiral I can see is the increase in cost of health care, which is reflected in total compensation. If interest rates could do anything about that, we would have unleashed that weapon a long time ago.

  6. Francois commented on Jul 25

    Jab Wrote: “As long as the bond market continues to buy the number and not figure out what we are doing…”

    Weeeeell….duh!

    What will happen when they decide to figure it out?

    Can you spell U-G-L-Y ?

  7. Robert Cote commented on Jul 25

    I wish there was an “I told you so” emoticon. I expect the BLS to go even further, instead of just striping out housing they will finally acknowledge the 70% of homeowners with mortgages* and include housing priced at the margin just in time to capture the greastest bubble decline in modern history.

    * Don’t expect this measure of owning to include inconvienient potentially inflationary facts like taxes or insurance. Also don’t expect it to be backdated to 1998 for a baseline or anything. Third, don’t expect aggregate calculations but only recent changes to fully capture the decline and fully ignore those stranded at the top. Finally, expect debt forgivness in short sales and foreclosures to show up as rising personal incomes.

    Feel free to borrow my nightscope. Just aim for the cold dark spot in the center of the chest where the heart should be. Use silver bullets.

  8. McSwiggen commented on Jul 25

    A four year old I know enjoys eating lemons from my drink, a particularly sour enjoyment. His brother, six, won’t touch it. He has a sweet tooth. How does one aquire such a sour constitution vs the Sweet taste of inflation. Discipline? Self control? Americans born from the parents who were bred to enjoy the sour taste of work and enjoy it now have a rotten tooth which needs to be pulled. Barry, forget the hollow points, keep writing and keep a pair of plyers in your back pocket. Thanks for being the keeper.

  9. Michael C. commented on Jul 25

    James Altucher on RM responds to Barry’s post of buying new lows is a bad idea:

    >>> …Took all Nasdaq 100 stocks since 1996, including stocks that have been deleted from the index (to avoid survivorship bias)…

    The results actually demonstrate that, over this period, the odds were on your side to outperform the market if you bought stocks at 52-week lows. The average return per trade was 7.34% (over 662 trades), including wins and losses. This far outperforms the average return per quarter of the Nasdaq during this period of 2.6%.

    Some 60% of the trades turned out favorably and 40% were failures…<<< I'm not so sure these same results would apply to the rest of the 2300 Nasdaq stocks. Any company that makes the Nasdaq 100 probably knows what they are doing more than many other smaller cap Nasdaq stocks so is more likely to rebound off new lows?...

  10. Steve commented on Jul 25

    I use to just accept that Food price inflation was noisy, but after Barry’s ex-inflation posts I looked it up, and as far as I can see it is far less noisy than things like clothing or entertainment (see poorly formatted data below from BLS http://www.bls.gov/news.release/cpi.nr0.htm ). Apparently the crop busts no longer occur on a regular basis, or a more global economy smooths it out. Imagine how smooth it could get without Farm subsidies and protectionist tariffs.

    1999 2000 2001 2002 2003 2004 2005 2006

    All items 2.7 3.4 1.6 2.4 1.9 3.3 3.4 4.7
    Food and beverages 2.0 2.8 2.8 1.5 3.5 2.6 2.3 2.3

    Apparel -.5 -1.8 -3.2 -1.8 -2.1 -.2 -1.1 2.2
    Recreation .8 1.7 1.5 1.1 1.1 .7 1.1 2.0

  11. j d ess commented on Jul 25

    at a time when this country cares less about the rest of the world than any in my lifetime, that we are concerned about having “internationally comparable” inflation numbers is good stuff. classic.

  12. me commented on Jul 25

    BINGO Uncle Bob is a winner.

  13. Damian commented on Jul 25

    Hard to feel like this isn’t a case of the current administration just manipulating the numbers to make it work for them. Time to take a page from the NeoCon patron saint Leo Strauss – regime change.

  14. Alaskan Pete commented on Jul 25

    I like it when Barry gets foaming at the mouth, fired up.

    Have you ever run that chart from Govt Shadow Stats (or something similar to that name) that shows the CPI as calculated by three different metholdologies… pre-Clinton CPI, the tweak made during Clinton’s term, and the experimental series they are running?

    Here’s a link to a graphic showing the CPI calc’d via the 3 methods:

    http://www.ernharth.com/wp-content/uploads/2006/02/preclintonCPI2006.gif

  15. jab commented on Jul 25

    Francois – I was being sarcastic in my comment – of course it is going to get ugly. But the bond market is in its own world right now and I have not heard a rational explanation to this point and who knows when it will change.

  16. Chief Tomahawk commented on Jul 25

    Barry, I believe your keen insight will make the realtors-turn-pornographers grateful today!

  17. JWC commented on Jul 25

    When will the financial powers that be get tired of this %^&*. You can say whatever you want to say about how low inflation is, but the average family is aware how difficult it is to make their paychecks stretch to the end of the month.

    Glad to see Barry is in a ranting mood. I just wish there were more of the pundits willing to call our governement out on stuff like this. But then, they probably are in that top 10% that are doing great in the Bush economy, so what do they care about the rest of us.

  18. fred hooper commented on Jul 25

    Gee whiz, Barry rants and the Bush haters come out of the woodwork. This crap has been going on for the last 25 years. Save it for the Daily Koz.

    “at a time when this country cares less about the rest of the world than any in my lifetime”

    “top 10% that are doing great in the Bush economy, so what do they care about the rest of us.”

    “the current administration just manipulating the numbers to make it work for them.”

  19. George commented on Jul 25

    Accurate view of reality = Bush hating?

  20. babycondor commented on Jul 25

    Speaking of future entitlement obligations, don’t forget all the holders of I-bonds and TIPS, whose returns are tied to “inflation.”

  21. alan commented on Jul 25

    IMHO, me thinks the bond market is not controled by the vigilantes anymore, but rather foreign countries. Greenspan called it the “conundrum”. And they have inflation in their countries attempting to control it.

  22. Bob A commented on Jul 25

    If UPS is a tell for consumer spending, look out below.

  23. Mark commented on Jul 25

    Barry-

    Took a long look to see what I missed while I was gone on vacation. Great stuff again.

    Glad to see The Boys have been in fine form— running it up on Bernanke speech and other such nonsense.

    Surprised that gold took such a dive but not much else. A/P, was that just overbought? War usually has all the safe haven buyers out in force….

  24. Alaskan Pete commented on Jul 25

    Bob A: UPS could very well be a “tell” on the consumer. However, look at longish term charts of UPS and you’ll notice a distinct seasonality. It tends to grind down summer into fall and rally sharply into year end and anticipation of holiday season gift shipping. Even with a slowdown in the consumer, we could see strong shipping due to less “let’s go to the mall” and more online bargain hunting. Not expecting that it will, but something to think about anyway.

    It used to be a no-brainer regular play for me every year…buy UPS in Sept, sell it in late Dec/early Jan.

  25. Alaskan Pete commented on Jul 25

    Dunno Mark, my intial thought re: gold back in the May selloff was to sit on the sidelines through the summer and wait for a favorable setup in technicals/COT in late summer/early fall. Still watching and waiting.

  26. Mark commented on Jul 25

    A/P-

    I have been doing the same. I am waiting for the Fall entry point.

    Thought maybe there was something I missed while on vacation. The lower highs here point toward a test of the 560 support area again.

  27. brion commented on Jul 25

    Alaskan Pete. That’s not a comparitive CPI calc chart, it’s an inflation LIMBO BAR!

  28. Suresh commented on Jul 25

    Alaskan Pete,

    Are you referring to John Williams’ Shadow Government Statistics: http://www.gillespieresearch.com/cgi-bin/bgn ?

    Gillespie Research tracks a pre-Clinton era CPI, based on a fixed basket of goods & services. John Williams does a good job explaining how the current CPI figures include adjustments for substitution and hedonics. Such adjustments have been made by the Bureau of Labor Statistics since the Clinton administration.

    An explanation of Gillespie Research’s CPI calculations can be found at http://www.gillespieresearch.com/cgi-bin/bgn/article/id=343.

  29. jab commented on Jul 25

    Bob Rubin was a BIG part of why alot of these changes to the CPI were made.

  30. Coruscation commented on Jul 25

    As rampages go, I’m more a fan of Falling Down.

    I still think that technical improvements of goods
    (price per 10 GB of iPod capacity, or price per
    diagonal inch of TV monitor) is holding down the
    real consumer price index.

  31. Zenrob commented on Jul 25

    Seeking Alpha the Web 2.0 way

    I came upon this post by Information Arbitrage blogger (and former Wall Street trader) Roger Ehrenberg, who writes that smart investors will use the power of Internet (search technologies, multiple data sources) to create smart and profitable investmen…

Read this next.

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