Inflation Confined to Rest-of-the-World, Avoiding U.S.

The United States has this fascinating relationship with inflation — there is this school of thought that if we disrespect it, belittle it, then perhaps it will go away.

That is not, unfortunately, the case in the real world. I guess the thought process is that if we collectively pretend there is no inflation, the Fed won’t have to raise rates.

Let’s look at last week’s PPI as an example. We saw a hefty increase in component prices in March. There was a big 4.1% rise in energy, with gasoline up +8.7%. Food "only" saw a 1.7% rise in prices. If we ignore these two life necessities (Inflation ex-inflation), the core was unchanged. A 1.2% decline in light motor truck prices mitigated the increases everywhere else.

Here’s the good news: if you forego consuming food and energy, and stick to buying light trucks, you have no inflation worries.

Elsewhere in the world, where real data matters and rhetorial games are not a substitute for real economic analysis, they do have inflation worries. The UK’s version of inflation (CPI is out Tuesday in the US), showed sharp price rises:

"The Office for National Statistics said output prices rose 0.6% on the
month in March to stand 2.7% higher than a year earlier, up sharply
from 2.2% the month before, a figure analysts had expected to be
repeated this time.

The figure spooked financial markets and the pound rose
to its highest in three months against the dollar of above $1.991.
Markets broadly expect Bank of England’s monetary policy committee to
raise interest rates again next month, taking them to 5.5%.

Analysts said the figures suggested firms were managing to put up their
prices in the wake of a year of steep rises in energy costs. Core output price inflation, which excludes volatile
food and energy prices, also picked up more than expected to an annual
2.9%, the fastest rate of growth since June 2006."

Note that Core Inflation prices are almost an afterthought, not the main focus of the inflation report.

We noted earlier in the year that The Office for National Statistics allows consumers to calcualte their own personal inflation rate, based on a variety of factors. I’d love to see the BLS try that trick . . .


UPDATE: April18, 2007 10:25am

Bill King sardonically asks:

“Explain to me how the country with the stronger currency and higher unemployment and less wage inflation – the U.K. – had the inflation rate for March accelerate to +3.1% (that’s the most rapid rise in 10 years) and at the same time our purported inflation rate dropped (and don’t even get me started on the components) ?????!!!!!!!”


Factory prices fuel inflation fears
Ashley Seager
Guardian Unlimited, Monday April 16, 2007,,2058237,00.html

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What's been said:

Discussions found on the web:
  1. W.Edwards commented on Apr 16

    The reason for excluding out energy and food is that they are both very volatile components of CPI. When first constructed, large increases one month were often followed by large decreases the following month. At the end of the day, the average change was expected to be no different than the core inflation rate. However, in recent years, food and energy inflation has consistently exceeded core inflation but people still treat this component as if it has no real influence on the price inflation that people experience everyday. Focusing strictly on core inflation is somewhat delusional but many now miss the point. This has become just another example of the pro-forma view now applied to the economy similar to how pro-forma financial statements were a big thing in the late 1990’s, early 2000’s as people tried to justify the lofty valuations placed on many companies.

  2. Macro Man commented on Apr 16

    Of course, UK CPI is itself a modified inflation measure that does not capture the real cost of living. Harmonized CPI carries a housing + utilities weight of just 10%- remarkable in a country where the median house price is moe than 5 times the median household income. This measure shows inflation at 2.8%.

    The retail price index, the broadest measure of inflation, carries a housing weight of 30%. This measure shows inflation at 4.6%.

    Guess which one the Bank of England targets?

    Similarly, the Bank of Japan targets inflation excluding fresh food prices.

    The Bank of Canada targets core CPI.

    The Riksbank in Sweden targets UNDX, “underlying” (e.g., core) inflation.

    So does the Norgesbank.

    So while I would concur that targeting inflation minus eveything that goes up is a mug’s game, the Fed is far, far away from being the only central banks that plays this game.

  3. js commented on Apr 16

    Macro Man,
    Point well made. Addionally, a big problem with the price indices is the way they handle housing. At least the food and energy costs are out there for all to see even if they publish the core measures. At the least, it makes indices hard to comapre across countries. But more and more are following the US model of imputed rent.

  4. dave commented on Apr 16

    what would the retail sales numbers look like this morning if we excluded food and energy?

  5. Joe commented on Apr 16

    Why do economists “exclude” food and energy prices due to volatility? Why not put a small MA filter, or some other mathematical mechanism, to incorporate them. I’m an engineer and if I ignored “volatile” dynamics, i’d be fired. But instead, i filter them so I’m not too disturbed by those dynamics unless they show a longer-term trend. Exclusion of these volatile food/energy prices is irresponsible. Incorporating them somehow to account for their volatility is the right thing to do. Does anyone already do that?

  6. mhm commented on Apr 16

    It is better to measure the construction costs (material) than the finalized house price tag. Thus speculation and other localized problems are left out.

    Food prices can be seasonally adjusted but I guess that’s too much work.

  7. wally commented on Apr 16

    Exactly, Joe. A simple solution!
    Political dishonesty has seeped into everyplace now; it creates huge long-term problems because nobody now knows what is happening.

  8. michael schumacher commented on Apr 16

    Speaking of dishonesty how does everyone like all the upgrades out this morning in the abscence of a monday morning M&A story.

    “let’s upgrade the entire market before the meat of earnings season begins”…….and if you actually said that in any brokerage house, as an employee, you’d have been shown the door.



  9. Macro Man commented on Apr 16

    What exactly is “criminal” about it?

  10. michael schumacher commented on Apr 16


    apparently you have not been reading anything that is posted here by BR.

    Criminal in it’s timing….why not last week?….week before?…… big M&A story so the market needs a little help right before earnings season.

    Show me… the market deserves to be upgraded so liberally BEFORE we really know what the 1st qtr earnings are. We pretty much have the , fake, inflation #’s so we know that PPI is still rising ergo CPI should rise as well….but let’s just pump up the already overvalued market a bit more.

    Never mind.,.. I suppose if you think the jobs #’s are real nothing I can post will sway you from your right to be “right”.

  11. Russ Winter commented on Apr 16

    Big swoons in California tax receipts. Inquiring minds would like to know how the Ministry of Truth can pull 0.8% retail sales numbers out of their hats?…s/winter/? p=655

  12. Macro Man commented on Apr 16

    It is investment advice. You can choose to follow it. You can choose to ignore it. Just because you disagree with it does not make it criminal.

    If you feel so strongly that the game is rigged and populated by criminals, why play?

  13. William commented on Apr 16

    If bad data hit the market and the market ignores it, was there bad data? At what point does any of this stuff matter? I know thats the trillion dollar question, but i have religously read this board, calculated risk and Roubini since July, many of the things they have written about are happening and appear to be the facts….but the general markets don’t care…

    What is a smart investor to do with this bearish information, just be aware of it until it matters? Seems to me, in this market ignorance is bliss…

    (i really hope my exasperation is THE top)

  14. michael schumacher commented on Apr 16

    don’t confuse what I post here with a trading style……this is a blog where people post idea’s to foster understanding….not trading idea’s..and yes I do think there is a serious agenda when stocks get upgraded before earnings are out…..does’nt mean I’m not profitting from it. Just making an observation and reading between the lines…something that more people should do.


  15. michael schumacher commented on Apr 16

    THere is a big difference between “investment advice” and pumping. Pumping a stock Like say AMZN this morning, by Deutche Bank, they say buy it because profit margins “might” improve later this year or next….no color, no reason, just someone pumping a low float (at least ownership-wise) at it’s 52 week high before earnigs are out. I can site dozens of examples just this morning alone.

    You don’t see a problem with upgrading just to do so with no reason?

    If you want to just call it “investment advice” than that’s you’re take on it…however I think you are smarter than that and realize it as well.


  16. Macro Man commented on Apr 16

    My observation (which may well be incorrect) is that you seem awfully cavalier about calling anyone who is not bearish crooked/corrupt/myopic/stupid.

    Global economic growth is strong. Global monetary conditions are not tight. Global markets are doing well. US markets are underperforming, just as the US economy is growing below trend. It is entirely reasonable for someone to conclude that a broadly constructive global environment supercedes US domestic worries, particularly when US multinational companies are well positioned to benefit from this.

  17. me commented on Apr 16

    How is this different from employment statistics? In the US we count half the unemployed and then brag about how our unemployment is half of Europe.

    My first graduate econ course the prof said the US has the worst economic statistics in the world. Seems he was correct.

  18. michael schumacher commented on Apr 16

    I’m not disagreeing with you, as you obviously think I am. There is a large disconnect between reality (data-questionable at that) and valuations.

    As far as your “observation” that’s just it…YOUR observation…just like it’s my observation that the entire market gets an upgrade before earnings are out is questionable in my book.

    You disagree but you offer up no real reason as to why just the same rhetoric that the perma bulls use…” it’s up because….it’s up”… skill in that.


  19. BSB commented on Apr 16

    Doesn’t the apparent disconnect between the headline and core inflation have something to do with relatively stagnant wage growth? In other words, if workers can’t demand higher wages in response to the higher cost of basic necessities, then demand for discretionary items, as measured by the core rate, won’t be as hot as it might otherwise be. Unlike in the past, the core rate doesn’t necessarily have to follow food and energy higher. So the real question, I guess, is whether the slow growth in labor costs is disguising higher overall inflation or is it truly holding it down? I lean towards the latter.

  20. Macro Man commented on Apr 16

    In Germany, anyone who enrolls in a job training scheme is counted as employed. So it’s easy to improve unemployment- pay people to enroll the scheme!

    In the UK, the unemployment rate is either 2.9% or 5.5%, depending on which source you use.

    In Japan, household spending is calculated from a survey filled out large by the wives of Ministry of Finance bureaucrats.

    Less than ten years ago, China reported full year GDP on December 28. It was never revised.

    While the US surely has its share of poor numbers, it is by no means alone…

  21. michael schumacher commented on Apr 16

    as far as the underperforming part of your arguement. I find it hillarious that the rest of the world seems to be raising rates, Japan excepted, or at least thinking about it and we are still fixated on lowering them and then say that are market is underperforming. Relative to what???? the rest of the world?? Europe can’t even take a shit unless it sees what we do first (the day before). We used to LEAD the world markets now we are taking our cue from europe, asia. et al… I see a large problem when we think we are insulated from inflation, as our FED acts as if we are, when the rest of the world seems to at least acknowledge it and take some steps to deal with it……we just pine for more rate cuts because we don’t want to do the heavy-lifting required to get us off of cheap money.

    So no…I don’t think our markets are undervalued…quite the opposite since fundamentals will show that. But I also understand that those are not the only way to interpret economic conditions…as do others in a negative and positive way. It’s all in the interpretation is’nt it??


  22. Eddie commented on Apr 16

    Blah blah blah – oil is way up (which I insist is out of the Fed’s control), hence the numbers are up. Would raising rates to, say, 7% do anything to help stem inflation here? I really doubt it.

    I’m curious to know what you guys feel would be appropriate action by the fed to target the price of a commodity of which we have no control over.


  23. michael schumacher commented on Apr 16

    Oil is out of the feds control…raising rates would’nt have ANY affect on it. There you feel better now???


  24. Charles Butler commented on Apr 16

    Anyone who remembers inflation-inspired 20+% interest rates in the early 1980’s as well as several lesser spikes over the following decade, must have a very hard time understanding what the fuss is all about. I sure do. These, I believe, are the good times. Easy money, low inflation and nil geopolitical risk.

    The damper on the party, for those of a more parochial outlook, would be the relative shrinking of the importance of U.S. markets (and econ stats) as the drivers of global investment decisions. A cleaning of the house with respect to the dollar might go some way to reversing that trend but as it stands, the word ‘irrelevance’ somehow keeps springing to mind.

  25. Charles Butler commented on Apr 16

    Michael S,

    As far as taking shits is concerned, you might not have noticed that the Eurex now closes at 4 P.M., New York time, and despite no longer having the impetus of reacting to the previous day’s NY close, the ESX managed a 0.5% gap open and now sits a tad shy of +1.5%.

    Brave new world.

  26. Michael C. commented on Apr 16

    William said “What is a smart investor to do with this bearish information, just be aware of it until it matters?

    Do you want to be smart or do you want to make money?

    Will you argue with the market or will you accept the prices that are in front of you?

  27. michael schumacher commented on Apr 16


    You forgot to add that if you do buy that light truck you can’t put any gas into it or feed the driver!!……LOL


  28. michael schumacher commented on Apr 16


    I am aware of that fact however the opening and closing times are irrelevant…it’s what they do during those times and I’ve said they don’t do much until they really have an idea what we do. We (markets) can just keep feeding each other just for the sake of going up or going down…neither is healthy IMO.

    Nice try though…


  29. Mr. Beach commented on Apr 16

    Talking about inflation. Anyone notice what is happening to the Shanghai index?

    It hit 2000 sometime in November.

    It hit 3000 in January.

    Then all “hell” breaks loose and it drops 10% in February.

    Now, everything is back. It hit an all time overnight of 3596. Did someone rename it

  30. Raj commented on Apr 16

    I live in Manhattan so this example could be an anamoly. My son’s private school has raised tution by 19% this year. My daughter’s day care sent us the letter yesterday increasing her fee by 17%. Our car garage fee increased by 8.5%. We pay rent of $4400/month for a two bedroom apartment. New rent $4675. However, the owner quoted $5900/month to a friend of ours who wanted to rent our apartment as we are planning to move out.
    Where is the inflation?

  31. Matt M. commented on Apr 16


    Is there any chance that stock,commodity and bond prices are controlled by supply and demand at the given bid/offer. The live market is reality, not a perception of reality. I’m not going to argue with you, but you have a strange view on what impacts price. Show me a trader that thinks his opinion matters to the market,and I’ll show you a broke trader.

  32. Estragon commented on Apr 16

    We’re like blind people describing an elephant by touch. We all have our own experience with the beast.

    A big difference between now and 1980 is the way the numbers are perceived and acted on. In housing, for example, prices were clearly rising sharply until 2006. Costs though, were actually dropping for the majority already in owned homes (cost = purchase price + PV(carry) – PV(sale proceeds). Low real wage increases through that period appear to support the notion that the homeowning majority perceived their cost inflation as low or even negative.

    It’ll be interesting to see if that perception changes now that housing prices have stopped rising.

  33. michael schumacher commented on Apr 16

    very nice Matt…….however you need to go up and read what I’ve said about writing on a blog and trading styles….don’t get them confused as you’ve just done.


  34. Winston Munn commented on Apr 16

    William said “What is a smart investor to do with this bearish information, just be aware of it until it matters?”

    There are valid reasons some market “truths” have entered the lexicon: Don’t fight the tape. The trend is your friend. Markets can stay irrational longer than you can remain solvent.

    At the moment, hope and greed are fueling the markets, driven by easy money. The same thing was occuring in 1929, and the early warnings were ignored.

    Awareness of the macroeconomics is a method to judge risk, not a timing device for the markets. Roubini, Ritholtz, and a handful of others are simply pointing out that the risk verses gain forward-looking seems to be out of balance.

    My own view is this is a good time to be sitting on the sidelines and not trying to guess whether the top is forming or whether the macroecomics will turn and support the upward thrust.

    Tops take a long time to form and can have many upward movements even while the entire market is rolling over.

  35. Charles Butler commented on Apr 16


    It’s just not true anymore, mostly hasn’t been for about a year and definitely not since trading hours were extended on the DAX and the Eurostoxx contracts, politely removing the usual 8 A.M. crapshoot. The fact is they are sucking money out of an underperforming market marked in an underperforming currency. As to whether distinct markets should look to each other to see whether stocks are the asset class to be in, I don’t see the problem.

  36. michael schumacher commented on Apr 16

    I’ve seen Europe be flat for almost entire sessions only to be up sharply after our market opens. To me Europe is irrelevant since most of it’s trades are influenced by the asian market which is …you get the picture.

    What would you’re position be if the dollar was much higher? I don’t see the connection between the low dollar and “underperforming markets” especially since the value of the dollar is influenced by the amount of hours uncle ben has the presses running for.

    I still can’t quite be around the statement that appears at most bull sites that “lowered earnings are priced in the market” is that so when the market, except NAS, sits at all time highs?

    Please help out this obvioulsly delusional conspiracy theorist out there…..LOL


  37. Fred commented on Apr 16

    Hey Barry…is this your blog or Michael Schumacher’s?

    Is there a comment you don’t have an opinion on MS?



  38. Grodge commented on Apr 16


    Markets can stay irrational longer than you can remain solvent.

    The converse is that your solvency may not survive waiting out the market’s irrationality.

    Your dollar’s value is dropping as it sits on the sideline and the only way to keep up with inflation is to find assets that are increasing in real value. The dollar is not one of them.

    I don’t know the answers, and everyone’s risk tolerance is different, but I do know that I don’t feel comfortable holding tons of US dollars as my real world consumer prices rise.

    This site is helpful, but to follow the implied advice is to fight the tape and go against the trend, and that is brutal for retirement investing as well as short-term trading.

    If you have been holding 100% cash for a year or more, then you have missed a 16% run in the S&P plus seen your buying power dwindle by at least 3%, or much more in real world terms as BR et al have been happy to point out.

    Answers? I don’t promise to have them. But my 20/20 hindsight tells me that holding cash the last year or so was deadly from an investment standpoint.

  39. V L commented on Apr 16

    The sleeping behind the wheel Fed has been a killer to USD; as a result, we are dealing with out of control rising inflation.

  40. John Thompson commented on Apr 16

    Working man’s perpective . . . we go further in debt with higher stagflation prices and only a crash will help us. Wish we weren’t fueling the world’s expansion (30% of Chinese exports consumed at least). Wonder if this acidic ocean dying thing is true?

    New money rich man’s perspective . . . juice earnings reports for 14 quarters straight. Cook the books with offshore accounts obfuscating the ledgers beyond the paid ability of the IRS to deal with. Thank Jesus the SEC records in Trade seven wis blowed up. A crash WILL not happen.

    Old money rich perspective . . . A crash can’t happen yet. We won’t allow it. Our new money hired hands are still bugging us too much to join the richie club. Therefore, must continue sucked ALL blood from working people. But we’ll soon save the world by developing new markets to be new worker bees to go into debt for us too? Another gin and tonic. But should we really do the right thing and break the new money? I like the fish.
    Maybe we can still save the ocean, hmm . . . wonder if our servant class will quit bugging us enough so that we can do the right thing. Maybe this quarterly profit thing really must go.

  41. michael schumacher commented on Apr 16

    as an update to what I posted regarding Amazon’s “upgrade” today. I think the upgrade has alot to with the more than 16K calls @45 that had 5 days left before expiration. They were worth .05 on friday. All of a sudden amamzons margins are set to improve….maybe.

    Jerk at Deutche Bank has a track record of this…

    Yes…it IS advice and you can choose to ignore it or not but it PAYS to understand the agenda from where the “advice” is coming from.


  42. Norman commented on Apr 16

    So far, 42 “comments” on inflation with the vast majority buying into either much higher inflation to come or here already but not reported. So, if anyone is looking for the HERD “we are them”. Maybe I should find a deflation blog. Any ideas?

  43. Winston Munn commented on Apr 16

    “The converse is that your solvency may not survive waiting out the market’s irrationality.”

    Grodge –

    Excellent observation and neither do I know the answer. In another post I commented that excess currency has to target a product before its inflationary pressure comes to bear. M3 for a month or so looked like it was stabalizing, but according to John Williams’s websit, Shadow Government Statistics, it has resumed its upwards explosion and is nearing 13% growth. It appears that the target of this liquidity may well be equities, and what will come next is an inflationary expansion of equity prices based totally on too many dollars chasing too few shares? I agree you are right in that sitting on cash too long is a losing battle.

    Question for the boss: with the renewed expansion of M3, is it time to start buying gold or silver?

  44. Greg0658 commented on Apr 17

    Eddie – replace oil with?

    Electricity for domestic cars, light trucks.

    Thats why IMO electric rates are climbing. Since home base solar panels and wind turbines are not able to fill the need.

    Maybe if I switch to canned goods, home systems would come close (spring/fall). That thought may have other benefits the way things are going with the weather.

  45. theroxylandr commented on Apr 18

    I wonder how should I calculate my personal consumption inflation if I… don’t consume that much. About half of my income remains inconsumed.

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