The Return of Inflation Ex-Inflation

Given yesterday’s eye-popping Producer Prices — the 12 months ending in February, overall wholesale prices rose 2.5%, the highest reading since August 2006 — there was some concern about today’s Consumer Prices.

And with good cause: the headline number was plus 0.4%, higher than expected (0.3%). We are told there is “nothing to worry about here,” though: Once we remove everything that has gone up in price, inflation remains contained. Core prices, excluding food and energy, increased only 0.2% in February.

Consider that February prices for “crude
foodstuffs and feedstuffs” were up 18.8% above year-ago levels, its no surprise that food
companies are passing those higher costs to consumers. Wholesale
consumer food prices are 6.8% above year-ago levels. The WSJ noted that Energy prices increased by 0.9% in February, while Gasoline prices rose 0.3%. Natural gas prices swelled 5%. Those begging the Fed for a rate cut can forget about the next 2 FOMC meetings; Barring a full-blown market meltdown, cuts at those gatherings simply aint gonna happen.

Ahhh, inflation ex-inflation. Where would we be without you?

 

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UPDATE: March 16, 2007 12:21pm

Note that the big drop in 2006 in PPI and CPI followed the change in GSCI energy exposure, when Oil dropped from $78 towards $50. It is now back near $60 . . .

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Sources:
CONSUMER PRICE INDEX:  FEBRUARY 2007
News Release text
BLS, MARCH 16, 2007
http://www.bls.gov/news.release/cpi.nr0.htm

Producer Price Indexes — February 2007
News Release text
BLS, MARCH 15, 2007
http://www.bls.gov/news.release/ppi.nr0.htm

U.S. Consumer Prices Rise 0.4% Amid Higher Food, Energy Costs
BRIAN BLACKSTONE
WSJ, March 16, 2007 8:53 a.m.
http://online.wsj.com/article/SB117404787807739330.html

U.S. Wholesale Prices Rise 1.3% As Food, Energy Costs Jump
BRIAN BLACKSTONE
WSJ, March 15, 2007 9:35 p.m.
http://online.wsj.com/article/SB117396175489038079.html

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What's been said:

Discussions found on the web:
  1. number2son commented on Mar 16

    It makes perfect sense to me. After all, who really needs to eat or go anywhere?

  2. spencer commented on Mar 16

    In a low inflation world firms tend to raise prices once a year, typically at the first of the year or the season. As a consequence if you look at the not seasonally adjusted CPI over half the annual increase occurs in the first quarter. while the reported core cpi for Feb only increased 0.2%, the nsa increase was 0.5% The combined Jan & Feb increase in the nsa core cpi was 0.87%, the largest Jan & Feb increase since 1996. While this does not imply that inflation is accelerating sharply, it does imply that the core cpi is not slowing.

    Moreover, note that real average hourly earnings was also down for the second straight month. The only time this has really increased in recent years is late last year when oil falling from $70 to $50
    held reported inflation to unusually low levels.

  3. Michael Schumacher commented on Mar 16

    Ben And Hank at it again to the tune of another $20billion yesterday.

    http://www.etfdigest.com/daveDaily.php

    Where do I sign up for these payments?…LOL

    With what the fake inflation numbers told us yesterday and today, which must be much worse than they are reporting, more like 8-9% total now, it’s no wonder the plungers have to support the market…question is how long can they keep doing that before the rest of world grows tired of the manipulation and pulls the plug.

    We should be well below 12,000 on the dow and just about breaking 2100 on the NAS but wait here’s another money drop while we wait for another miracle to appear.

    At least I have a race to do….oh wait I retired…shit I’m bored now.

    Ciao
    MS

  4. costa commented on Mar 16

    so bernack gave $20 billion to who? and how can he just give $20 billion out?

  5. Michael Schumacher commented on Mar 16

    It’s called “temporary open market operations”
    and is a “loan” that’s due back in a reltively short period of time.

    File it under Plunge Protection Team.

    Why do you think the markets have not tanked on the PPI/CPI? when in the past much lower readings have caused….nevermind…..just read it

    Ciao
    MS

  6. costa commented on Mar 16

    I did read it just was wondering who excatly got the money?

    I agree with everything your saying. the PPT has been in full effect for a while. I am losing all faith in the stockmarket.

  7. Michael Schumacher commented on Mar 16

    Broker dealers…..now the bug question is which ones got what amount…..that, unfortunatley, we will never know.

    Sorry for the curtness…….been an eye-opening week .

    MS

  8. Michael Schumacher commented on Mar 16

    Barry-

    Anyway we could get some color on this?:

    http://www.etfdigest.com/daveDaily.php

    I know it’s sort of the unspoken crap that goes at teh market but it’s just so ridiculously obvious what’s at work here and it’s not picked up by anyone at all.

    OR is it the preverbial career suicide if one does?

    Would love to hear something…..anything on this…

    Ciao

    MS

  9. KirkH commented on Mar 16

    The Burrito is the staple foodstuff here in San Diego. Prices aren’t going up but they’re shrinking to the point that they look like taquitos now.

  10. Michael Schumacher commented on Mar 16

    I live in SD……most of my neighbors are just short of tossing in the towel as they bought in 05-06……sucks if you bought at the top but all the signs were there. Unfortunately it’s hard to ignore those when home ownership is dangled in front of you.

    MS

  11. Si commented on Mar 16

    If this PPT thing exists its a disgrace and something which only adds to our problems. Freemarkets….where?

  12. costa commented on Mar 16

    theres no free market. They will do something to prevent housing from completely crashing too. The whole US needs a big shake out.

  13. OldVet commented on Mar 16

    The pouring of money at below-market rates into the 21 primary broker/dealers authorized to do business direct with the Fed is disgusting. Really disgusting. The Treasury has also been doing some short-term money injection, to its eternal discredit. You can check the figures for yourself daily at:

    http://fms.treas.gov/tip/reports.html

    http://www.ny.frb.org/markets/omo/dmm/temp.cfm

    If this irritates you as much as it irritates me, you can express yourself as tartly as you like by emailing the Governors of the Fed at:

    http://www.federalreserve.gov/feedback.cfm

    I advised them yesterday: “I’d like to say that recent short term loans to primary broker/dealers including the 14-day amount yesterday are not going unnoticed. I think it is beyond imprudent to lend money to brokers who will use their automated robo-trading programs to inflate stock market prices in the US and around the world. The lack of supervision of mortgage lending institutions, the creation of risky loans, and the transfer of risk from gamblers in the mortgage business and stock market operators is not appreciated, at least not by me. You guys are supposed to be good stewards, and serve up low inflation, not high stock markets.”

  14. Si commented on Mar 16

    OldVet, thanks for the info, and superbly worded letter to the fed. Hope mine will be half as good.

  15. robert campbell commented on Mar 16

    OldVet,

    >>>The pouring of money at below-market rates into the 21 primary broker/dealers authorized to do business direct with the Fed is disgusting. Really disgusting. The Treasury has also been doing some short-term money injection, to its eternal discredit.

    Thanks for the post. Would you be kind enough to explain these “injections” to me?

    Are they loans? If they are loans, they have to be paid back, no? If so, they (the broker/dealers) would have to sell the stock they bought in order to pay back the loans from the Fed.

  16. Winston Munn commented on Mar 16

    Here is a problem I have grasping how PPT or any Fed action can affect the market.

    The Fed uses repos to infuse short term money into the system. Just for argument, let’s say $20 billion in overnight repos went in Wednesday, and the cash was used to buy selected securities. On Thursday, that $20 billion has to be repaid with interest. If this money were in the market, it would drain an equal amount on the next day – if that much money can move the market up, then yanking it would surely send the market down.

    It seems the only way these repos could truly create liquidity is if there were some mechanism that allowed a conversion of the repo into a long-term debt, which would keep the money in circulation.

    Is it due to fractional reserve banking? Again, if a hypothetical $20 billion in overnight repos is introduced, can the primary dealers then use this capital to lend out $50, $75 or even 200 billion? This would allow the money lent minus the original $20 billion plus interest repo to stay in the liquidity pool, and the excess money lent would be secured by the securities purchased.

    Does anyone know what the tick count has looked like during these suspicious times?

  17. mark commented on Mar 17

    old vet, what is wrong with the market going up? why would anyone want the market to go down? what good can become by a falling market? i don t understand this attitude. could you esplain?

  18. Michael Schumacher commented on Mar 17

    Mark-

    re: the last comment

    are you serious?? or just looking for a laugh.

    MS

  19. Winston Munn commented on Mar 17

    Found this answer to my own question:

    “The loans the banks make multiply the money via the magic of “fractional reserve banking”, and the investments the banks make very frequently go into the stock market – and that’s why there’s a strong relationship between repos and the stock market.”

    So it would seem what happens is the Fed lends $20B in repos, which raises the reserve of the banks, allowing the banks to lend $38B. After the $20B has been repaid, $18B in new money has been created quited literally “out of thin air.” If this “new” money is then margined, who knows how much could pour into the markets?

  20. OldVet commented on Mar 17

    Mark, I’m not against markets going up. But I want it to be investors who make it go up, and because they have conviction that the economy is strong and the companies likewise. I don’t want bureaucrats tampering with the regular operation of stock markets. It’s hard enough for a little guy to catch a break as it is.

    Propping up the stock market with massive short term loans is tricking investors, not helping them make good decisions. And I don’t especially trust the Fed to be good stewards of my money or my markets. It was Alan Greenspan who praised the developement of sub-prime mortgages in April 2005, upon which the commerical lenders went insane and issued loans for McMansions to every gambler in America.

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