Inflation Part II

Here’s that missing post from yesterday.

I found it ironic that the market was rallying on supposedly benign inflation news, while these were the headlines. It just goes to show you, that  when Mr. Market wants to go higher, he’s going higher. Period.

Wheat prices hit 11-year high  (06.14.2007)
U.S. wheat futures roared higher Thursday, rising to fresh 11-year peaks on continued concerns about tightening world wheat supplies amid drought in Eastern Europe and rains in the U.S.

Oil Rises to Nine-Month on Speculation Gasoline Output to Trail Demand Crude oil rose to $68 a barrel in New
York, the highest close since September, on concern that U.S.
refiners will be unable to keep up with growing gasoline demand.

Copper Gains; Concerns Ease That Interest Rates Will Rise Copper rose for a third day in New
York, capping a weekly gain, as a tame inflation report eased
the risk of higher U.S. interest rates that threatened to curb
investment in manufacturing and the construction industry.

Gold, Silver Rise in New York as Dollar Weakens Gold and silver rose in New York
after a decline in the value of the dollar against the euro
increased the appeal of precious metals as alternative

Corn, Soybeans Rise as Lack of Rain in Midwest Threatens Corn rose to a three-month high in
Chicago and soybeans gained on forecasts for dry, warm weather
that will reduce soil moisture and increase plant stress for the
two biggest U.S. crops.

Cotton Extends Rally to Three-Year High Cotton in New York rose, extending a
rally to a three-year high, after supplies dwindled in China,
spurring speculation shipments from the U.S. may increase. 

Food, energy costs’ exclusion debated When it comes to measuring inflation, consumers and economists often don’t speak the same language. When consumers think of inflation, they often focus on prices of things they buy regularly, such as food and gasoline, which have been going up significantly in price this year.

Cost of Gas and Food Rose Sharply Last Month Americans felt the pinch of higher gas prices and eroding wages last month, even as an important gauge of inflation drifted lower, government figures showed yesterday.  Over all, the Consumer Price Index rose 0.7 percent in May, the Labor Department reported. The core rate, which excludes food and energy, was up just 0.1 percent, a welcome development that encourages the Federal Reserve to keep interest rates steady.

Like mentioned previously, what you see in temrs of inflation just depends upon where you look . . .

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  1. Eclectic commented on Jun 16

    Ah… it’s like you said:

    “How can I post a new topic and best complement Eclectic’s comments in the last topic.”


  2. Shrek commented on Jun 16

    Stocks are rallying because of inflation. Just ask Zimbabwe. Nevermind the fact that we are going nowhere in real terms.

  3. Estragon commented on Jun 16

    I think it’s important to keep in mind what we’re trying to measure, and why.

    The what:
    CPI attempts to determine the value of the internal value of the USD as a medium of exchange, as experienced by the consumer. Consumers tend not to buy copper, they buy TV’s in which copper is a component. They tend not to buy wheat, they buy bakery products of which wheat is a component. In order to measure consumer price inflation, we need to measure the prices of the final goods, not the constituent inputs. In order to measure overall consumer inflation though, the price of ALL consumer and ONLY consumer goods (or a truly representative sample thereof) weighted according to their consumption, needs to be included.

    The why:
    The internal value of the USD as a medium of exchange influences economic decisions and resource allocations. Obviously, it’s a mistake to make longer term decisions based on short term noise. To systematically exclude goods used by consumers simply because they’re volitile is faulty thinking. Spikes in energy prices, for example, almost certainly put downward pressure on other prices, all else held equal. Obviously, the exclusion is capturing the pressure on other prices without capturing the equal but opposite spike in energy. Conceptually, a trimmed mean partly offsets this by removing both high and low outliers, but since the high and low aren’t necessarily symmetric, the overall effect is distorted. To avoid that, the solution is to look at trend rates and moving averages to gain signal and lose noise.

    In the end though, it’s how people react to the information that matters as much as the information itself. The market reaction yesterday suggests a perception that inflation is contained. That perception in itself may have more influence on future inflation than the mechanics of the number itself.

  4. mh497 commented on Jun 16

    Flip the coin over on these and look at the other side. Most of these can be seen as signs of strong demand – worldwide.

  5. ac commented on Jun 16

    What you saw Friday was market error and ignorance.

    Unable to comprehend the information and mis-understanding the trigger consequences. Headline inflation is running over 5% so far this year. That WILL seep into the core rate at some point. Remember when headline inflation began falling late last summer, but the “core rate” kept rising a couple of months longer?

    My guess June’s “core rate” has a nice rise. I think it is no surprise the big yield shift over 5% occured in June. It will probably go up to the unadjusted inflation stops rising. If it rises over 6%, a core rate of 3.5% is all but assured late this year.

  6. Lars M. Pedersen commented on Jun 16

    My 2 cents worth… In the case of the US, where households carry a negative savings rate, core CPI is an indication of inflation, what comes on top of the core measure should really be thought of as a tax on growth.

    Stocks rallied for good reason — moderate growth (but no recession) and muted core inflation offers a very positive backdrop. You should, however, avoid companies with domesttic US exposure going forward and stick with large cap, intenationally exposed companies.

  7. will rahal commented on Jun 16

    It is amazing how closely correlated CPI(y/y % change) and Non-Durable Goods as % PCE are. See
    The rise in CPI is hurting the consumer to a point of atypical behavior.
    I am convinced that this time arround the consumer is maxed-out.

  8. VC commented on Jun 17

    The rents are lower as the management has changed the model from giving one month free rent to lowering the monthly rent. I am renting a condo in Boston area and know this from my research. Actually, net rent has gone up.

  9. Globetrader commented on Jun 18

    I’m writing with a suggestion to the US Bureau of Labor Statistics: Why not base the inflation calculations on the price of the Flagship Intel processor alone. For years now it’s around 999 USD. That way the US finally has zero inflation with a growing economy…

    and who cares about 5% to 8.4% headline inflation anyway (based on the monthly inflation numbers including food and gas) That number can be disregarded totally…who cares what we need to pay for food and gas..
    ask any lawyer and he will tell you, that anyone is supposed to have money

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