Inflation Vanquished ?

We have long used this platform to provide a reality check on some of the questionable errata we hear from various entities. It seems everyone has an agenda, and whenever we encounter  official BS, from the Government, Wall Street, Mutual Funds, the White House, or the Media, it offends us.

The dishonest tendency towards spin, the official salesmanship of mendacity raise our hackles. For those who wish to accept the official data at face value, we have two words for you (no, no those two): Good luck!

If your reality is defined by the trend — and for technicians and traders,  we think trend is extremely important — then our views of macro-economics, GDP, CPI, Retail Sales shouldn’t matter at all to you. Try not to let it influence your worldview.

For those of you who want to know what is really going on, however, this site can be helpful in making sense of the complex and contradictory data flow. Last week’s inflation-free CPI, and upside surprise in Retail Sales are classic examples. These two are intimately connected, because total Retail Sales are a combination of a) people buying more goods (units) and 2) people paying more for the same goods (price rise/infation). So if we are to figure out either, we really need to understand both. 

Today, we will see what we can do to make sense of each of these since we first addressed them last week. Lets start today with a look at our Inflation-free CPI. For this, we go to John Williams’ Shadow Stats

“The unbelievable $5.4 billion monthly decline in the seasonally-adjusted October trade deficit to $58.9 billion from September’s $64.3 billion was more than accounted for by an equally preposterous plunge in reported oil import prices, which was on top of price declines in the prior two months that more than accounted for oil’s recent drop. Without the phony oil price decline, the trade deficit would have risen to $64.9 billion

The seasonally-adjusted November CPI-U was unchanged from October, (down 0.15% unadjusted), following October’s 0.49% adjusted monthly drop. Of significance, seasonally-adjusted gasoline fell by 1.6%. In conjunction with the retail sales report, this suggests an understatement of gasoline inflation by 3.9% in November, and a corresponding 0.2% understatement of the CPI, which is about how much the CPI came in below market expectations…Annual inflation for the SGS Alternate Measure was 9.4% in November, up from 8.9% in October.” (emphasis added)

Consider actual surveyed fuel costs, via the Energy Information Administration (EIA):

11/06/06  – 220.0 
11/13/06  – 223.2
11/20/06  – 223.9
11/27/06  – 224.6
12/04/06  – 229.7   
12/11/06  – 229.3   

Maybe my math is rusty, but that doesn’t look like prices came down in November, does it?

Another big WTF: Medical care costs, which have inexplicably fallen 3.7% y/y. Bill King points out that "this is a ‘substantial slowing’ [BLS] from the perennial 4.2% increase we have seen for the past dozen years . . . And where is the inflation from increasing rents that most everyone sees?"

Sgscpi

Chart courtesy of Shadow Stats

~~~

Yes, Virginia, there is a Santa Claus who brings presents to all the unquestioning little boys and girls. Take note for any letters you may want to send him — he’s moved his workshop from the North Pole. In the future, you should address your letters to:

Postal Square Building
2 Massachusetts Ave., NE
Washington, DC 20212-0001

>

Sources:
Weekly Retail Gasoline and Diesel Prices   
The Energy Information Administration (EIA)
http://tonto.eia.doe.gov/dnav/pet/pet_pri_gnd_a_epmr_pte_cpgal_w.htm

Historical alternate data for the U.S. GDP, CPI and M3
John Williams
Shadow Stats, Dec. 16, 2006
http://www.shadowstats.com/cgi-bin/sgs/data

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What's been said:

Discussions found on the web:
  1. jmf commented on Dec 18

    you really wonder when this will ever end.

    almost every stat that is coming out to be questioned.

    in the end this “creative” accounting will make things worse.

    good that all the foreign central banks buy all the bonds…..

  2. Sailorman commented on Dec 18

    How is this for spin? I would like to point out that if a corporation used cash accounting, they would go to jail.

    Treasury Report: FY06 US Budget Gap Worse Under Accrual Accounting
    Click to learn more…

    12-15-2006 11:45 AM EST

    WASHINGTON -(Dow Jones)- The U.S. government’s budget deficit in the 2006 fiscal year would have been more than three-quarters larger using accrual accounting, as opposed to cash accounting practices, according to an annual government report released Friday.

    The official U.S. budget deficit, calculated using cash accounting, was $247.7 billion in the fiscal year ended Sept. 30, coming in 22% narrower than the previous year’s gap and marking the smallest shortfall since 2002. But under the accrual-accounting method, the budget deficit jumps to $449.5 billion, up more than 80% over the cash accounting total, according to the report released by the Treasury Department.

  3. dryfly commented on Dec 18

    Remember when inflation was inflation?

    I was digging thru some of my father’s stuff this weekend (he had passed away over the summer) and came across a copy of the Mpls Trib from Feb 23, 1980 (right after the Miracle On Ice – he and I are/were both avid hockey fans, especially U of Minnesota)

    On the front page, next to the ‘Miracle’ story, this:

    Prices Up 1.4% Last Month

    Pushed by the largest gasoline price rise in history, consumer prices rose 1.4 percent in January, the steepest monthly increase in more than six years, the labor Department reported Friday.

    ***

    At an annual rate, the increase amounts to 18.2 percent, compared to 13.3 percent for all of 1979.

    ***

    In another development yesterday, borrowing costs soared to record levels as some of the nation’s largest banks raised their prime lending rates by three-quarters
    of a percentage point, to 16-1/2 percent.

    ***

    The administration’s reaction to the day’s development was somber.

    So honest, so naive… back then. Makes you almost want to blush.

  4. Teddy commented on Dec 18

    Dryfly, I lived thru the 1970’s. IMHO, the difference between the economy of THE LAST 2 YEARS and then is that inflation has been higher now, but then people’s MEDIAN salaries were escalating. As I am sure you know, we had a strong manufacturing base then with a trade surplus. And Wall Street was very unhappy because they weren’t making any money.

  5. tj & the bear commented on Dec 18

    Barry,

    Okay, you spotlight SGS stats on CPI and also reference the SGS website under your blogroll links. Given that a realistically higher CPI equates to a true lower GDP, are you ready to admit that we are in fact already in a recession as JW so ably illustrates?

  6. tj & the bear commented on Dec 18

    Barry,

    Okay, you spotlight SGS stats on CPI and also reference the SGS website under your blogroll links. Given that a realistically higher CPI equates to a true lower GDP, are you ready to admit that we are in fact already in a recession as JW so ably illustrates?

  7. tj & the bear commented on Dec 18

    Barry,

    Okay, you spotlight SGS stats on CPI and also reference the SGS website under your blogroll links. Given that a realistically higher CPI equates to a true lower GDP, are you ready to admit that we are in fact already in a recession as JW so ably illustrates?

  8. tj & the bear commented on Dec 18

    Barry,

    Okay, you spotlight SGS stats on CPI and also reference the SGS website under your blogroll links. Given that a realistically higher CPI equates to a true lower GDP, are you ready to admit that we are in fact already in a recession as JW so ably illustrates?

  9. tj & the bear commented on Dec 18

    Barry,

    Okay, you spotlight SGS stats on CPI and also reference the SGS website under your blogroll links. Given that a realistically higher CPI equates to a true lower GDP, are you ready to admit that we are in fact already in a recession as JW so ably illustrates?

  10. tj & the bear commented on Dec 18

    Barry,

    Okay, you spotlight SGS stats on CPI and also reference the SGS website under your blogroll links. Given that a realistically higher CPI equates to a true lower GDP, are you ready to admit that we are in fact already in a recession as JW so ably illustrates?

  11. tj & the bear commented on Dec 18

    Barry,

    Okay, you spotlight SGS stats on CPI and also reference the SGS website under your blogroll links. Given that a realistically higher CPI equates to a true lower GDP, are you ready to admit that we are in fact already in a recession as JW so ably illustrates?

  12. tj & the bear commented on Dec 18

    Barry,

    Okay, you spotlight SGS stats on CPI and also reference the SGS website under your blogroll links. Given that a realistically higher CPI equates to a true lower GDP, are you ready to admit that we are in fact already in a recession as JW so ably illustrates?

  13. tj & the bear commented on Dec 18

    Barry,

    Okay, you spotlight SGS stats on CPI and also reference the SGS website under your blogroll links. Given that a realistically higher CPI equates to a true lower GDP, are you ready to admit that we are in fact already in a recession as JW so ably illustrates?

  14. tj & the bear commented on Dec 18

    Barry,

    Okay, you spotlight SGS stats on CPI and also reference the SGS website under your blogroll links. Given that a realistically higher CPI equates to a true lower GDP, are you ready to admit that we are in fact already in a recession as JW so ably illustrates?

  15. tj & the bear commented on Dec 18

    Barry,

    Okay, you spotlight SGS stats on CPI and also reference the SGS website under your blogroll links. Given that a realistically higher CPI equates to a true lower GDP, are you ready to admit that we are in fact already in a recession as JW so ably illustrates?

  16. tj & the bear commented on Dec 18

    Barry,

    Okay, you spotlight SGS stats on CPI and also reference the SGS website under your blogroll links. Given that a realistically higher CPI equates to a true lower GDP, are you ready to admit that we are in fact already in a recession as JW so ably illustrates?

  17. tj & the bear commented on Dec 18

    Barry,

    Okay, you spotlight SGS stats on CPI and also reference the SGS website under your blogroll links. Given that a realistically higher CPI equates to a true lower GDP, are you ready to admit that we are in fact already in a recession as JW so ably illustrates?

  18. tj & the bear commented on Dec 18

    Barry,

    Okay, you spotlight SGS stats on CPI and also reference the SGS website under your blogroll links. Given that a realistically higher CPI equates to a true lower GDP, are you ready to admit that we are in fact already in a recession as JW so ably illustrates?

  19. tj & the bear commented on Dec 18

    Barry,

    Okay, you spotlight SGS stats on CPI and also reference the SGS website under your blogroll links. Given that a realistically higher CPI equates to a true lower GDP, are you ready to admit that we are in fact already in a recession as JW so ably illustrates?

  20. tj & the bear commented on Dec 18

    Barry,

    Okay, you spotlight SGS stats on CPI and also reference the SGS website under your blogroll links. Given that a realistically higher CPI equates to a true lower GDP, are you ready to admit that we are in fact already in a recession as JW so ably illustrates?

  21. tj & the bear commented on Dec 18

    Barry,

    Okay, you spotlight SGS stats on CPI and also reference the SGS website under your blogroll links. Given that a realistically higher CPI equates to a true lower GDP, are you ready to admit that we are in fact already in a recession as JW so ably illustrates?

  22. Rich commented on Dec 18

    One observation regarding the comment that questions inflation due to increasing rents: Rents rose most of the year here in my market (San Diego) at a pretty good pace. However, after the summer season, a ton of unsold condo inventory has been dumped on the rental market because it can’t be sold. Rents are now giving back the gains of the past year. There is a glut of rental units on the market now, mostly unsold condos, but it is also spilling over into the rental homes market as well. I don’t see inflation from rent being a significant factor until the overall housing glut works itself out. There are a lot of people out there who are now forced into being landlords because they can’t sell their homes and they are taking whatever rent they can get in a market where there is a lot of choice for potential renters. I recently signed a lease in August — four months later, comparable units are going for monthly rental rates 10-20% lower.

  23. donna commented on Dec 18

    I’m in San Diego too – was seeing the “for sale” signs replaced with “for rent” signs for a while on houses. Now, I’m seeing the “foreclosure” signs….

    And I’m in pricey Poway…

    I think you could rent at a bargain price here right now.

  24. spencer commented on Dec 18

    you need to build in a transportation lag on import prices for oil. The price reported by importers will be the price they paid before they loaded it on the tankers about six weeks ago not the current market price.

  25. rex commented on Dec 18

    Barry: Your math is rusty.
    To find out whether prices changed in November, you must first know what the price was in October!!
    The BLS surveys prices throughout the month, so November’s price is an average compared with an average for October.
    Here’s the monthly average price for gasoline, courtesy of the Department of Energy:
    July 3.025 August 2.999 Sept. 2.606 Oct 2.293 Nov. 2.275

    By my math, $2.29-$2.27 = 2 cents. That’s a little less than a 1% drop. The BLS reported gasoline prices fell 1.6%, but you must remember that’s seasonally adjusted. All in all, the price changes reported by the two government agencies are not all that different. Certainly not so different that we should all start wearing tin foil hats.

  26. rex commented on Dec 18

    One more thing about imported oil prices.
    The price importers pay IS NOT the market price for cash crude or crude oil futures. This is because some importers have already locked in their deliveries at a much lower price. If you were smart, you might have bought some oil back in 2004 for delivery in 2006. If you had done that, you’d have paid about $35 a barrel.
    In October, refiners’ cost of oil was about $52 a barrel. But the futures contract was about $58 a barrel.

  27. EthanS commented on Dec 18

    Uh, Barry, I’m sure it feels like prices are rising a lot – but that SGS data is facially absurd. If prices were rising 8% per year, they would double every nine years. Call me crazy, but I don’t think nominal consumer prices have doubled since 1997.

    In some sectors, sure they’ve gone up. Oil has almost tripled since 1997, medical costs have risen sharply, and housing is up substantially since then. But that’s mostly it.

    Food, cars, and clothes are nowhere close to doubling in price. Technology prices continue to fall as well. Even in housing, rents are are being kept down by the glut of rentals from speculative investment condos now losing money for the owners who couldn’t flip them one last time.

    Maybe inflation IS understated right now. The data may be lagging the economy a few months, but not to the tune of sustained 8% inflation for the last decade.

  28. ksh commented on Dec 18

    I’m going to join in on the inflation is pretty tame band wagon using anecdotal evidence. On rents, as a DC resident, I haven’t seen my rent go up in two years and For Rent signs are definitely more prominent than a few years ago.

    Again while anecdotal the following seems like a trend. On Friday I received the following two offers: a local casual Italian restaurant – buy two entrees get a bottle of wine free with your meal; and a more upscale restaurant – Get $600 in gift cards for $500.

    From the number of sale signs I saw at the mall this weekend, pricing power sure appears weak to me.

  29. Jordan commented on Dec 18

    Can’t dispute the last couple of points from the last two posters….but…

    The things you have to pay for (which should be in “core” inflation) such as gas, electric, transportation, food, water, medical, insurance…..are all going up and for the most part at 10%+ annually. Cars, consumer items…those things are more deflationary in nature and are being produced offshore on the cheap. Most important, those things represent a small % of your overall expense pie. I buy a new t shirt a few times a year, a new computer once a year, a new stereo/tv once every 2 years…but I get gas twice a month, pay bills 12x a year, etc.

    The other thing to consider is local/state taxes, costs and inflation. Every local fee that you need to pay to the state has gone up a lot, and also look at property taxes. A middle income family may own a house and pay tax that on a 300K house one year and then the state says the value is now 330K and they have to pay tax on that unrealized gain. This is the type of stuff thats not included in the cpi but is contributing to the rising cost of living.

    Overall, the actions of the government & Fed run contrary to their spoken words and we should be thankful for analysts like John Williams and Barry who look beyond and behind the numbers. Those are the real professional analysts.

  30. Vega commented on Dec 18

    Awesome post, Barry. Keep on keepin’ on. Thanks.

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