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


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


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


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

-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.

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What's been said:

Discussions found on the web:
  1. Rdub9000 commented on Oct 18

    Inflationary pressure has driven up the price of a decent six pack(newcastle, sierra nevade) by 11.12% in the last 2 months (7.99 to 8.99). Might just be my local market though (san diego).

    Anybody know of any sites that track the prices of general goods (big macs, beer, water,etc.) ?

    This might be a good site to set up if it doesn’t exist…
    price of product by store and zip code over time….

  2. Mike M commented on Oct 18

    How about: price inflation is the direct result of monetary inflation? If the money supply is expanding by roughly 10% per year (rough estimates as M3 is hidden from us), why shouldn’t price inflation show up somewhere? Surprise! It will. It baffles my mind that the market accepts the Fed’s absurd belief in themselves as inflation fighters. The Fed is the ONLY source of lasting inflation. The Fed will be pumping like mad now that the housing bubble is bursting.

  3. Cherry commented on Oct 18

    “Look for next week’s third-quarter advance GDP estimate to come in above consensus estimates”.

    Advanced estimates are for children. You don’t need to wait for government reports to caculate GDP. 2000’s 3Q advanced estimate was 2.7% nominal GDP whoops(real nominal was -.3%). 3rd Q3 2006 growth sucked wind nominally. Though a bounce in the 4th in nominal growth is a given.

    Inflation will only be a problem if the FED makes it a problem and I have a feeling with Bernanke and friends, he may really try.

  4. Jeremy commented on Oct 18

    Cherry, I’d be interested in your estimate of Q3 GDP growth. Anyone else’s as well.

  5. kuros commented on Oct 18

    i know this is not a statistic filled comment but
    i am a single person and have it ok yet i struggle to keep just ahead of my next bill…what i do not understand is how does a family of four do it? I mean pay the basic bills, and the heathcare, car payments, eat well, save for college and all the rest of it. Sometimes when i see a young family in public i just want to walk up and ask them…how do you do it??

  6. V L commented on Oct 18

    No matter how you measure it (core CPI or Fed favorite PCE deflator), inflation is HIGH (y/y 2.9%). Moreover, it is not trending down. (Core CPI July – 0.2; August – 0.2; September – 0.2) and it is well above what the Fed considers as their comfort zone (2.0%).

    Fed’s main responsibility is PRICE STABILITY (ignoring and not fighting this inflation will be considered as negligence).

    Currently, the Fed has two options to fight inflation:
    1. Hike rates to bring inflation down and risking a recession.
    2. Ignore it, pray for it to come down by itself, and risk even worse prolonged recession in the future (and possible Congressional Investigation into why the Fed did not hike rates sooner)

  7. jj commented on Oct 18

    the reason they dropped M3 is because they’ve been focusing on MZM the last 3 years , a much broader figure….. you can probably find it @ the NY or St. Louis Fed sites

  8. whipsaw commented on Oct 18

    This kind of roundup is a nice feature, Barry. Sort of like with “Today’s Papers.”

    I personally have moved to share Richard Russell’s view that regardless of what the Fed says it is doing, it is in fact injecting massive liquidity into the system. I don’t think that the disappearance of M3 was a coincidence, I think it was essential, and the apparent division among Fed members is mainly for show.

    So how does an asset based economy that depends on inflation survive long term? I suspect it does not unless you spread the model across the world so that everybody is just as vulnerable as you are- say hello to Mr. Globalization!

    And once you’ve got them sucked in via the central bank fraternity, no problem because USD is the primary means of valuing all of these assets, so nobody wants USD to fall very much even if it should. It’s sort of like having a couple of dozen conjoined countries who are all at the mercy of our own monetary/fiscal craziness.

    I’m not sure if this was the plan or it just worked out like that. The world has been “globalized” (i.e., colonized) a couple of times before in modern history which led to the 7 Years War and World War I and I don’t expect this time to be much different.

  9. Bob_in_ma commented on Oct 18

    “No matter how you measure it (core CPI or Fed favorite PCE deflator), inflation is HIGH (y/y 2.9%)”

    Uhuhuh! Don’t be using that inflation ex-deflation figure on Barry’s blog! All items, 12 month CPI is up just 2.1%. THAT’s the important figure.

    Anyone else notice the absense of Barry’s monthly flogging of the straw man, core inflation?

    But the important question is, when is the next media appearance, and what will be the attire? ;-)

  10. rebound commented on Oct 18

    Nice roundup!

    The Federal Reserve Bank of San Francisco Economic Letter by John C. Williams really caught my attention with the statement:

    “Research shows the U.S. economy has over the past two decades shown a reduced tendency to transmit inflation forward.”

    Is it fair to say (point out the obvious) that wage growth during an inflationary cycle would amplify inflation? Or using the Fed’s language, “transmits inflation forward.” There is likely some multiplier effect when wages also rise, and these dollars re-enter the economy. Or so it was.

    Well, over the course of the last two decades, we have been outsourcing labor to cheaper pools of labor. There is no longer wage pressure or wage growth and therefore there is no mechanism for the CONSUMER/WAGE EARNER to “transmit inflation forward” in a economy during an inflationary period.

    I think it is simple. Times have changed and people simply don’t have inflated wages to help propagate any inflation wave that might come along.

  11. blam commented on Oct 18

    Normally a drop in the CPI of that magnitude is rather sobering, suggesting we are in a recession. However, given the unease over the possibility that speculative banks and hedge funds are whipsawing the markets with Japanese carry leverage, it seems like just another day in the financial arena.

    PPI was off the charts and core was high, again. Producer pass along price increases don’t seem to resonate as inflation like increased wages, so no need to worry. A Fed rate cut is probably necessary, seeing as inflation has disappeared. Wouldn’t want to promote too much savings, we need consumption, dadgummit.

  12. rebound commented on Oct 18


    Superb point. I tend to be a terrible investor, hence the reason why I hang out here to try and learn a thing or two.

    So yes, being right (or not) about causation on the macro side has little to do with investing in healthy companies, or trading.

    BTW: I’m getting ready to go short again, which means that the Dow is headed to 14,000 in the next two months.

  13. V L commented on Oct 18

    “All items, 12 month CPI is up just 2.1%. THAT’s the important figure.”

    Just a few months ago when all items CPI was nearly twice of core CPI, the “important figure” for you was core CPI.
    Now after 33% drop of gas prices the “important figure” became all items CPI – very convenient flip-flopping (pick the number that you like and claim it to be the “important figure”)

    It does not matter how you cherry pick the data because according to FOMC the PCE deflator is better than the CPI (mainly because it better accounts for the fact that, as prices of goods and services change, people’s spending habits change)
    and Mr. Bernanke himself prefers forecasting inflation in terms of the core PCE deflator. (at least it was what he stated in the past)

  14. blam commented on Oct 18

    This whole market move is in anticipation that the Fed will continue to stoke inflation. The only way to puncture said bubble would be for the Fed to actually restore price stability.

  15. V L commented on Oct 19

    The mother of all conflicts of interest – US government and Inflation.
    On one hand, because of huge deficits and out of control spending they need high inflation (it is similar to raising taxes without actually raising taxes, also it makes the deficits look smaller when you compare them in relative terms) and on the other hand they need to hide inflation (if they report true inflation they would have to pay more in social security benefits)

  16. russell120 commented on Oct 19


    Knowing where you are in the business cycle can be helpful with knowing how to evaluate companies.

    An obvious example is the commercial construction roll ups that all went bust, or nearly bust in the last downturn (Encompass, IES, et al). The problem was that when they were rolling up the small contractors they bought based on peak of cycle numbers.

    An advantage to this type of thinking is that you don’t have to “time” your market peaks and valleys. You just have to have some idea of what type of terrain you are in.

  17. fred hooper commented on Oct 19

    “So how does an asset based economy that depends on inflation survive long term? I suspect it does not unless you spread the model across the world so that everybody is just as vulnerable as you are- say hello to Mr. Globalization!

    And once you’ve got them sucked in via the central bank fraternity, no problem because USD is the primary means of valuing all of these assets, so nobody wants USD to fall very much even if it should. It’s sort of like having a couple of dozen conjoined countries who are all at the mercy of our own monetary/fiscal craziness.”

    Whipsaw wins first prize!!! You’ve really nailed it. There are billions of debt-requesting suckers out there for the bankers to indoctrinate.

    Kuros, I suspect that nobody answered your call for help because it brings back painful memories, i.e. perhaps we’ve all been there? Never, never use debt for consumptive purposes and, of course, don’t buy stuff you cannot afford:

    My dad once told me that it is just as easy to marry a rich ugly girl as it is to marry a poor beautiful one, or something to that effect.

  18. calmo commented on Oct 19

    V L, And they need to minimize the charges on the debt they pay to those foreigners who continue to provide more of our consumer goods and services.

    The absence of wage driven inflation is looking more conspicuous all the time, no? (It’s not like Ford employees are threatening to ruin the company by striking for higher wages.)
    No, the housing slowdown has the Fed’s attention and rate increases will not reappear until that industry shows some signs that it is not expiring like the Norwegian Blue, but merely taking a rest after being tired and shagged out following a prolonged squawk.

  19. cButler commented on Oct 19

    A short take on the issue from Europe, where the ECB continues to tighten….

    Since the June lows, the developed stock indexes that have outperformed every other in the world have been the IBEX 35 and the SMI – in that order. The IBEX is most heavily influenced by interest rate/inflation sensitive stocks like banks and electricity producers – the days of Telefonica’s dominance are over. And Switzerland by the equally sensitive banks and insurance sector.

    The impetus behind the Spanish markets 25% rise in that period has been the battle to own the electric utility Endesa (ELE), begun buy a natural gas distributor, then picked up by E-On and then ultimately shaken up by the entry of a large Spanish construction company in the fray. The stock has nearly doubled in a year and a bit. At the same time another huge Spanish builder buys a 10% stake in the country’s number 2 electric.

    Aside from the clear message this action sends about the prospects for the continuation of the housing boom in Spain, the interest rate signal is even more valuable. E-On, to counter Acciona’s entry in the game, raised it’s offer from 27€ to 35€ per share. At that price, it takes only a small uptick in long rates to threaten their debt rating.

    They could be wrong, but for the foreseeable future these people don’t see inflation as a problem – and they live or die by that kind of decision.

  20. Leisa commented on Oct 19

    Per economy…

    the easiest way to spot a bad investor:
    they worry about “the economy” instead of the stocks they invest in
    I’d posit that the best investors are placing their money in asset classes that are priced cheaper than their real value–which generally offers a rich risk/reward scenario. Stocks are not the singular best asset class. Understanding the economy is key (but we all know that even the experts cannot agree on where we are in the cycle) to asset allocation.

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