Blogger’s Take: Inflation (CPI, PPI)

This is another of our new features: Blogger’s Take. Similar to the WSJ’s Economist’s Take; Actually, its a blatant rip off of a fine but overlooked feature.

Ourt approach is more informal:  We look at different topics, but try to be less news driven, allowing a little depth and wide ranging discussion froma  broader cross section of people (as opposed to a narrow slice of Wall Street
Dismal Scientists).

Here is our second go round to the simple question: "What Up With Inflation?"

"Many economists are surprised that there has not been a wider and more persistent outbreak of inflation in light of the run-up in energy prices.  One reason why this might not have come to pass is that energy has become a smaller percentage of GDP since the last oil price “shock”.  While the experience of the 70s may still be vivid, the economy has changed significantly since then.

A Federal Reserve Bank of San Francisco Economic Letter by John C. Williams (hat tip: Economist’s View) summarizes nicely recent research into inflation persistence and the stability of inflationary expectations.  Research shows the U.S. economy has over the past two decades shown a reduced tendency to transmit inflation forward.  In short, the economy is more resilient in the face of inflationary shocks.  In addition, whether due to economic durability or Federal Reserve skill long term inflationary expectations have remained remarkably stable.

A plausible explanation for this behavior might very well be globalization.  As the U.S. economy has become, in a sense, more diversified, it may be better able to withstand price shocks in ways that were impossible twenty or thirty years ago.  While the most recent energy price shock was certainly eye-catching it may not have been big enough to offset the economy’s increased flexibility.

–Abnormal Returns

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It’s hard to believe that inflation can be a worry when the PPI shows a 1.4% decline for the month of September, but that’s exactly what happened on Tuesday as traders worried about the much stronger than expected rise in the core reading.  And since the market was quick to dismiss the headline number while oil was rising, it’s only fair that we ignore it while oil is on the way down. 

Were investor fears over the stronger than expected core reading misplaced though?  From the looks of this morning’s CPI report, it appears yesterday’s high reading in the PPI was just a blip due to the cars and light truck component, and we therefore remain confident (as the ISM report illustrates) that inflation should continue to trend lower.

-Paul Hickey, Tickersense

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Following on the heels of the inexplicably large upward adjustments to the benchmark payroll survey, where almost a million new jobs were uncovered, come this week’s bipolar reports on inflation where high consumer prices appear to have been vanquished along with high energy costs, though there still seems to be some trouble with core inflation.

One can only conclude that the sole impact (if not the sole purpose) of recent economic reports is to further confuse an already baffled public about how they should view the economy. Look for next week’s third-quarter advance GDP estimate to come in above consensus estimates and don’t be surprised if it too grows ever more difficult to interpret.

-Tim Iacono, The Mess That Greenspan Made

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This is a strange time in the history of inflation. I filled
up my gas tank yesterday for $27 compared to a long stretch where it cost me
$40. It was this decline that went along way to moving PPI and CPI this month.
My positive sentiment from the gas station is likely to be undone next month
when our health insurance renews. With no change in our medical condition (which
is healthy) our premiums doubled when we renewed last year but they doubled in a
sneaky way. We pay the same premium but have twice the deductible. Now back to
joy; we may be the last holdouts to not own a flat panel TV but I see where a
32” can now be had for $999. If we wait until June we will be able to get a 37”
for $999.

This is a strange time for inflation and I think this has
been and will continue to be manifested in the markets’ reaction to the various
data points that measure inflation. If people can experience a divergence of
thought, and traders can experience a divergence of thought, and markets can
experience a divergence of thought, where does that leave the Fed? Regardless of
what is truly going on, of course if energy prices don’t snap back that is
definitely a big plus, the final rate hike is likely to be
excessive.

-Roger Nusbaum, Random Roger

~~~

The split CPI highlights the bipolar nature of the current economy.  The statistics and trends we use for macro predictions of the economy are conflicting, leading me to think that something unique is happening or that something is being mismeasured.  From a business perspective, I think companies will hold tight and keep investment steady until they have a clearer picture of the future.

-Rob May – Businesspundit

~~~

Today’s inflation figures should be pleasing to those who advocate basing policy on overall CPI rather than core CPI. I am not one of those advocates and the rise in core inflation is worrisome. However, I expect slowing growth in future months will reduce inflationary pressures so, for now, I don’t believe there is any need to raise interest rates further in response to the elevated core inflation measures. There are surely hawks on the Fed who would challenge that position, but I expect it is the majority opinion among FOMC members at the moment.

-Mark Thoma, Economists View

~~~

"Set hedonics to one side. Suspend, for a moment, argument over what ought to be included or excluded. Instead, just consider a picture of your preferred, consistently calculated end-user US inflation measure – usually the CPI, PCE or the GNP deflator. Such a survey reveals year-over-year inflation still hopping an upward trend, even with today’s positively received core CPI pause.

As this is written, European markets and US futures are rising strongly on the CPI core data. This reflects a belief that the ideal outcome of slower economic growth culling inflation is panning out. Under this view the Fed even gets to cut thereby touching down softly.

But the Fed wants to see core inflation fall, not merely pause; and at 2.5% yoy (PCE) and 2.9% yoy (CPI) it is still well above the bank’s 1% to 2% target. There is no way the Reserve will cut on this data; and the longer the rising trend is in place whilst the Fed holds the greater the risk a simple downturn becomes recession. On the other hand, a premature cut might look a good call for a while but ultimately risks further arousing a fertile inflation bunny.

That outcome may only defer an even uglier choice."

-RJH Adams, Capital Chronicle

Thanks, guys. Nicely done.