What? Inflation?

Okay, so here’s the "Official" explanation: the selloff over the past few days is courtesy of this new-fangled discovery called INFLATION. That’s why rates have ticked higher.

You see, we have been living in a benign non-inflationary environment, and just yesterday, it seems that some traders have discovered that — WTF?! — prices of goods and services are rising.

Of course, many pundits, traders and investors — and a goodly part of the Federal Reserve — have convinced themselves that there really wasn’t any inflation, so long as we wear blinders and ignore those pesky goods and services like Food and Energy. You know, those annoying items utterly necessary for survival.

That’s been the f@#ktard explanation, anyway. If you believe it, though, you must be living in a cave — which given the market for bat guano and stalagtites, probably has achieved the elusive Fed goal of price stability.

Bill King notes that:

For April 2007, the monthly food cost is $1044.80 for average family of four, per the USDA.

For April 2006, the monthly food cost is $995.40 for average family of four.  Ergo y/y food inflation is 4.963% according to the USDA.

The BLS has ‘food’ inflation (urban) at only 3.7% y/y (unadjusted) for April 2007. Ergo, there is a 34% discrepancy in food inflation reporting between US Government Agencies – the USDA and BLS.

This story from May 24, 2007
went largely unnoticed:  Reuters reports, “The Federal Reserve’s adherence to core inflation, which strips out food and energy prices, is taxing the public’s patience and  risks credibility, a senior U.S. central banker said on Thursday.

‘In the United States over the last 20 years, core measures excluding food and energy did take out a lot of noise. But in the last three years it has been extracting quite a bit of signal,’ said Harvey Rosenblum, head of research at the Federal Reserve Bank of Dallas.” ( emphasis added)

Meanwhile, the rest of the world continues to raise their interest rates to fight inflation.


The Chicago Sun-Times was kind enough to include this table of food price increases:



Here’s a sampling of where food prices are heading across the nation:

National average prices April 2007 April 2002 April 1997
White bread (pound) $1.20 $1.00 $.86
Ground beef (pound) $2.25 $1.78 $1.38
Bacon (pound) $3.50 $3.26 $2.66
Whole chicken (pound) $1.12 $1.11 $1.00
Eggs (dozen) $1.62 $1.05 $1.08
Milk (gallon) $3.14 $2.78 $2.61
Butter (pound) $2.86 $3.20 $2.18
Ice cream (half gallon) $3.79 $3.72 $2.90
Red delicious apples (pound) $1.10 $.91 $.90
Bananas (pound) $.52 $.50 $.52
Navel oranges (pound) $1.24 $.75 $.60
Iceberg lettuce (pound) $.99 $1.15 $.67
Tomatoes (pound) $1.63 $1.32 $1.35
Frozen orange juice (12 oz.) $2.52 $1.89 $1.73
Sugar (pound) $.51 $.44 $.44
Peanut butter (pound) $1.75 $1.98 $1.81
Coffee, ground roast (pound) $3.44 $2.98 $3.89
Potato chips (16 oz.) $3.48 $3.29 $3.18

Source: U.S. Department of Labor, Bureau of Labor Statistics




Blame your bill on corn, weather
Chicago Sun-Times, June 6, 2007

Labor Costs Get Hard to Control
WSJ, June 7, 2007; Page A2 

Core inflation testing Fed credibility -Dallas Fed
Alister Bull
Reuters, Thu May 24, 2007 5:29PM EDT

Years of Global Growth Raise Inflation Worries
WSJ, June 6, 2007; Page A1

Bernanke’s Sense for Now: Hands Off
WSJ, June 6, 2007; Page A2   

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What's been said:

Discussions found on the web:
  1. Jrs commented on Jun 7

    “Inflation is the cruelest tax of all” (quote yet do not have source) that impacts those with less income in a manner greater than those with great incomes. I too am growing tired of the constant droning from government officials that is in fact intellectually dishonest especially with inflation.

    Some examples –

    1 – Inflation reality vrs inflation reported when food and energy is included.
    2 – Unemployment including structural unemployed, those left workforce on a permanent basis and the uncounted illegal workers that are not longer working. (Illegal worker comment supported by Latin American remittance that are weakening – less employment less remittance back home)is greater when the definition is expanded.
    3 – GDP Estimate by current White House Team “Still strong, rebounding and estimated growth rates of 2006 for each of the remaining quarters. Really…I guess the LEI are telling that story? Hummm….cough, cough…
    4 – Housing and the REVERSE wealth effect will not impact consumer spending. Humm…Seems to me the argument was made the other way when home prices surged.

    So, I put all this together with the Food prices and all of this validates that one must think for themselves as well as read the core data without the spin cycle.

  2. Strasser commented on Jun 7


    Add to this the ‘smoke and mirrors’ act of General Mills. Yesterday, according to the AP, “General Mills spokesman Tom Forsythe said customers should actually see lower prices per box, but the boxes will be smaller, so the effect is a price increase of a few percent…Forsythe said General Mills cereals often appeared more expensive on the shelf because of their larger box sizes, and the switch to smaller boxes will make them appear more competitive, even with the increased price per ounce.”(http://biz.yahoo.com/ap/070605/cereal_prices.html?.v=3)

    Forsythe also said this should help retailers sell General Mills products “at prices we know consumers want.”

    Honestly, my mind ‘numbed up’ as I read this. Is it a joke? Can someone really think this way? Is this something like “…you know that 2 cups we sold you for “x” amount? Well, we’re going to now give you a whole lot less at the same price, but it’s going to look like more… and by the way, you’re going to be really happy about it”.

  3. Winston Munn commented on Jun 7

    The egg bubble is being driven by speculative omelet demand.

  4. j d ess commented on Jun 7

    my thought walking past the sun-times box yesterday was, “Barry’s gonna love that”. I need to make more real friends…

  5. zell commented on Jun 7

    Beware the echo chambers. A thousand voices a thousand times trying to ward off cognitive dissonance……Also geopolitical risk is at a screaming high after a year long build yet it is totally ignored. For a potentially high impact event with a high probability of occurence…..ugh. If Barry is interested I’ll spellit out. I seem to be blocked most of the time.

  6. mhm commented on Jun 7

    There’s no inflation as long as you have whole chicken and lettuce for the main dish and banana/peanut butter for dessert. Every day.

  7. zell commented on Jun 7

    Not blocked this time!! I’m talking about a 6-8 week time frame so I feel it a responsibility to give warning. Retired in North Florida. Time to go load up and make my Meals on Wheels deliveries. Go Gators!!

  8. Ken Dyck commented on Jun 7

    I agree with your main point, but this bit you quoted is simply misleading:

    Ergo, there is a 34% discrepancy in food inflation reporting between US Government Agencies – the USDA and BLS.

    This kind of pseudomath always irks me.

    It costs 4.963% more than it did a year ago to by food according to the USDA. That’s 104.963% of last year’s price. The BLS reported that it costs 3.7% more. That’s 103.7% of last year’s price.

    When you keep the 100% of last year’s costs in the calcualtion, the discrepancy, if you insist on taking a percentage of a percentage — a sure sign that your analysis is flawed — is (104.963 – 103.7)/103.7 = 1.21%

    I’d argue that the best measure of the discrepancy is simply the difference: 104.963 – 103.7 = 1.263%

    But I suppose that doesn’t make as good copy.

  9. dblwyo commented on Jun 7

    Actually if you look at the data over the last few decades the BLS has a strong case for seperating F&E from Core. The former is very ‘noisey’ around the underlying trend and even back during the oil crisis was more noise than signal. Rosenblum’s (Dallas Fed) comment is very astute – that is, for various reasons F&E are part of core now. We should ask why, how long and will it continue or is it a longer-than-normal abberation.

  10. spencer commented on Jun 7

    The difference between what the BLS & USDA report is because they are measuring similar,
    but different baskets.

    The biggest difference is that USDA is measuring a basket for a poor family while
    BLS has a basket for a middle class family.

    It just reflect the point that there is no one inflation rate. Everyone experiences a different inflation rates based on what they consume and official measures are just reasonable approximations for broad averages.

  11. Neal commented on Jun 7

    the balancing act between cutting the rates to stimulate and rasing rates to fight inflation continues. More people are pushing for rate cuts due to some faltering in the consumer, but the rates cannot be cut because of potential dollar damage, ergo, inflation argument wins for this week.

  12. michael shumacher commented on Jun 7

    Silly rabbits…….institutions had to swing from long to short hence the “revelation” that inflation suddenly matters. It matters only when it matters to institutional $$$$.

    THere have been subtle clues as to big money’s change of sentiment. It’s not going to be screamed out at you..


  13. me commented on Jun 7

    But but, gas is cheaper than 1971 and you can buy another new computer for $400 (or an IPhone for $600.

    And look how much homeowners insurance has gone down, especially in Florida.

  14. Sue commented on Jun 7

    The ONLY inflation that matters to those in power is if workers’ wages increase. Then, inflation’s a crisis and must be driven back.

  15. ManhattanGiuy commented on Jun 7

    BR – you forgot to mention the wage increase over the same time period. I am making two times more than what I was making in 1998.

  16. michael shumacher commented on Jun 7

    Nice little juice of the SPY there with the printed money in hand…took all of 4 minutes from the close of the “auction”….

    Getting desperate with the money drops now….


  17. bodanker commented on Jun 7

    Of course, many pundits, traders and investors — and a goodly part of the Federal Reserve — have convinced themselves that there really wasn’t any inflation, …

    I know I’ve said it before on this site, but I’ll say it again: I worked at a Federal Reserve District Bank in 2004-05 as an economic research analyst – assisting the economists with their research.

    There was much discussion regarding the measurement error of “core” CPI beginning in early 2005. That’s about the time the Cleveland Fed came out with their median CPI measure, and the Dallas Fed – whose head of research is mentioned in the above post – created their trimmed mean PCE measure. Furthermore, the FOMC minutes have stated for some time that the main concern of the Fed is that inflation will fail to moderate as expected (i.e. inflation – by whatever measure they’re now using – is above their comfort zone).

    I’m not sure what evidence suggests that a good part of the Federal Reserve have convinced themselves that there is no inflation. One could argue that – given inflation data – the Fed should raise rates, but this is what is discussed/argued in FOMC meetings.

  18. MarkTX commented on Jun 7

    No kidding MS,

    look at the spread between the SPY and the SPX

    The Juice IS ON!!

  19. jkw commented on Jun 7

    They recently used the smaller box trick on the pasta I buy. They switched from 16oz boxes to 14.5oz boxes without changing the price at all. I’m not even sure if the grocery store noticed – they charge the same price for the boxes at the back that are still 16oz (until they run out). I’ll have to look more carefully at the price markings to see if they still say 16oz on the tag below the shelf.

    I’m definitely much more upset about shrinking the boxes than I am about raising the prices. They’ve raised prices on this pasta about 2-3 times in the past year and I never cared. But when they shrunk the boxes I looked at all the other brands to see what I could switch to. I hate it when companies do deceptive things like shrinking their boxes without making it obvious.

    Cereal has recently gone up in price significantly. The way I buy cereal is I go through the whole aisle and see what’s available for $2/pound or less. When I started doing this in 1998, it was about 80% of the cereal. A year ago it was everything that was on sale and a few other things. Now the cereal that is on sale is frequently over $3/pound.

  20. wunsacon commented on Jun 7

    Sue, that’s so true, ain’t it?

    Zell, what event can you spell out for us? Hurricanes? Iran? Or a hurricane veering towards Iran?

  21. M.Z. Forrest commented on Jun 7

    A monthly food budget of $1K wouldn’t be for a poor household. At 15% of expenses, that would translate into a household income of $6500, or $78K/yr. If you go by median household income of $46K, food would make up 26% of the budget, which seems a little excessive.

  22. Chad commented on Jun 7

    Where the hell is milk that expensive? I’m paying less than 2002 prices locally.

  23. Peter Boockvar commented on Jun 7

    Helping to exaggerate the downward move in bond prices is big selling from mortgage guys who are readjusting their duration levels as prepayment risks start to go down as rates go up. The slower prepayments extends their avg maturities and they need to sell longer end bonds to get their duration back in line. The reverse occurs when bond yields go down which raises prepayment risk, reduces mortgage durations and mortgage guys need to buy bonds to extend them again. Thus this process causes buying on bond strength and selling on weakness exaggerating the moves in either direction.

  24. Craig commented on Jun 7

    This inflation thing is sneaky.

    Has anyone here received their new property assessment? I got mine Monday and the assessor says my property went up 80% in four years. Guess what will happen to my taxes?

    And yours, and those subprime borrowers hanging by a hair…..

    Taxes would be inflation, no?

    Add gas, energy, food, taxes, shelter. What price is the FOMC looking at? They appear to exclude life.

    Why are folks like Warren Buffett buying big now? INFLATION.

    They can (could) buy inflating assets at bargain rates. Note how that TYT puts the brakes on the M&A action and the general markets?

  25. Michael Donnelly commented on Jun 7

    I’ve been amazed for years now that anyone would buy a T-Bill at 5%.

    Oh sure the real return is 2.5% if you are silly enough to believe core CPI or core PCE matters, but when you factor in total inflation the real return is about half that. That ain’t gonna fund my retirement.

    So I’ve been heavy on the international side and with the dollar in the tank, that’s been a great play at least to now.

    So a question for BR that is really no longer just academic.

    Over the mid to long term, does the Fed target total inflation or core? If core why, when the two have been decoupled for the better part of 5 years.

  26. Strasser commented on Jun 7

    Only one thing to say about no inflation, and that is that the Fed is delusional and they live in a different world than the rest of us. They are not aware how “real” people live. So they spoon feed us through the media as to ‘how kind and gentle they are, how thoughtful and worried and attentive to our situation’, as they x-out everything that is essential in our lives so they can spin their web. If I weren’t a lady, I say something other than “What a bunch of CRAP!”

  27. me commented on Jun 7

    “Where the hell is milk that expensive?”

    $3.69 in Atlanta and an article in the paper just said 5 bucks this year.

  28. Eddie commented on Jun 7

    I just paid over $5/gallon of milk at the local Farm Stores!

  29. Dale C. commented on Jun 7

    Hi Michael Schumacher,

    How can you tell that the SPY is being juiced with printed money? Or is that just a guess?


    Dale C.

  30. michael shumacher commented on Jun 7

    because just after the daily money drop (oft explained as the temporary open market conditions) the SPY gets bought hand over fist at several pennies above the ask. Once you start the ball rolling it’s easy to get the lemmings to follow you. Although today is one of only a few days where following that strategy would not have been very successful.

    It is a guess however the dots are just so easy to connect if you have an open mind about it.

    “auction” (I love that they still call it that) ends at 9:40am (EST) and then SPY starts to head up ( on the buys over the ask ) at 9:44am. Just look at the daily chart of the SPY……it’s not coincidental…


  31. Jay Weinstein commented on Jun 7

    Many years ago, I saw a TV report on 20/20 or Primetime Live or some such about price hikes by shrinking standard sizes for items.

    The General Mills thing is NOTHING NEW—it just seems to be getting a little more PR than normal.

    Remember when a can of tuna fish was 7 oz.? Now 6 oz. There are dozens of products where this holds true.

    Though I am glad to see this tactic is getting some noticed…

    I cannot find the tv report, but here is a similar post from last year…

    Hellmann’s Mayo: Introduces the 30 oz. Quart*
    Filed under: Retail, Food/Groceries — Edgar @ 6:40 am
    Some things always come in quarts: milk, motor oil, and mayonnaise, for example. You don’t have to look at the net weight statement, because a quart is 32 ounces, and that is what you always get.

    Next time you go to the supermarket and pick up a quart-size jar of Hellmann’s (in the east) and probably and probably Best Foods (in the west), you are going to be in for a little surprise.

    *MOUSE PRINT: The net weight statement now reads “30 oz.” instead of 32.

    While the size change is apparent looking at the old and new jars side by side, you don’t have that comparison in the store. You see a dozen identical jars that look like the regular quart jar, and priced like the regular quart jar. You grab one, and you get snookered because they all have two ounces less in them.

    All mayonnaise has come in quart jars for decades. Unlike tuna fish that has been downsized multiple times, this is the first time it has happened to mayonnaise. That’s what makes it so surprising, and why it has gone virtually unnoticed.

    Why did Unilever Bestfoods do this? Here’s what customer service said:

    “At Unilever Bestfoods we have always taken great pride in offering the highest quality products at reasonable and fair prices.

    Recently, inflationary pressures have brought about by the increased costs of raw materials. Rather than raise our prices, we chose to slightly reduce the size of the 32 oz quart and 16 oz pint. This is the first time in over three years that we have had to increase costs to our consumers.”

    this is from Mouseprint.org

  32. michael shumacher commented on Jun 7

    and sure as the sun rises in the east several people here will discount everything I say or post as delusional or some sort of crack pot.

    The truth hurts perma bulls, you’re precious rally is fake. How else do you explain the 10 year over 5% yield and all of a sudden the market decides to sell off. All because the Fed will not manually raise rates so the bond market will happily comply and do it for them.

    It’s too bad that alot of retail people have been sucked into the market only because the Fed is a toothless entity beholden to the Bush administration.

    Fire Away like I know you will…

    and before you do just realize that people can still make money regardless of what they write. Just like all those NFLX calls I sold today bought at .10 sold at .70. So to Fred and Manhattan guy I do just fine….


  33. semper fubar commented on Jun 7

    I guess this will be a boon to the cookbook publishing industry. They’re going to have to revise all their recipes & reprint all their cookbooks, so that 1 cup now equals 6 oz. Will a half-pound of butter now be less than 8 ounces too? Maybe we’ll all just buy smaller eggs to compensate.

    Should make for some interesting stuff coming out of the kitchen.

  34. Dale C. commented on Jun 7


    Thanks. I think you’re probably right.

    Dale C.

  35. V L commented on Jun 7

    The higher yield is not so much because of higher inflation but because the bond guys made the wrong bet that the Fed will cut. (They expected much more severe economic slowdown and artificially depressed the yields.)

    On Monday, Gary Shilling announced that he has turned bullish on US stocks; in particular, he has been moving money into energy stocks.

    On Tuesday, we get technical program driven selloff of both stocks and bonds. (The yield is one of the variables for sell programs)

    The funny part is that the bears had predicted the selloff because of a recession, but the current selloff is secondary to the better than expected economy and higher yields. Higher growth does not necessary mean higher inflation though.

    S & P 500 earnings are expected to grow 7-8%; therefore, it is silly to panic and to think that the yield increase by 0.03-0.05% will compress the multiples.

    Wall Street expected P/E multiples expansion during the second half of the year and now they are getting the wakeup call from the reality – no cuts and no P/E multiple expansions.

  36. Valdan commented on Jun 7

    But look how stable the price of bananas is! Is that because we live in a banana republic?

  37. Mike_in_FL commented on Jun 7

    long bond currently down a point and a half (and counting). That’s a 1.36% decline — the sharpest drop I can find in any day for continuous long bond futures going back all the way to March 22, 2005. Yeah, I’d call it a massacre.

  38. V L commented on Jun 7

    I meant by 0.30-0.50% (not 0.03-0.05%)

  39. js commented on Jun 7

    What I find frustrating is that Fed claims there is more signal in core CPI while the overall measure is excessively noisy. However, if you plot annual changes in both going back to 1960, the overall tends to lead core and not the other way around. So which one is better? which is the standard that other measures should be judged by?

  40. mark commented on Jun 7

    i noticed that beef was up over 100% since 1997. However i can tell you that when we sell our cattle we get the same price as we did in 1997. WTF????

  41. bodanker commented on Jun 7


    Visit the pages I referenced in my earlier post and you’ll see that the year-over-year percentage changes of median CPI, 16% trimmed mean CPI, and trimmed mean PCE have all been greater than or equal to their respective headline rates for the past 6 months.

  42. Red Ocean commented on Jun 7


    I grew up on a farm and thus follow agriculture prices. You are not being honest about beef cattle prices. Everyone knows that beef cattle have been much higher in the last few years. Feeder cattle are selling at much higher rates than they ever did, sometimes up towards $1.50 a pound for 500 pound feeders. This is because of the increased prices for fat cattle at market in the last few years.

    As can be seen on this chart:


    Fat cattle prices have increased from a low of below 60 cents a pound in 1997 to a peak of over 100 in 2004 and firmly planted in the 90 cent range through out 2006.

    So if you are still selling for 1997 prices I suggest you find a better cattle buyer who actually pays market prices.

  43. donna commented on Jun 7

    I also noted half loaves of bread in the store this week….

  44. Michael Donnelly commented on Jun 7

    Don’t get too cranked up about the smaller portion sizes, that sort of quality adjustment is easy for the BLS, the only thing is does is try to fool the folks.

    Running over to the USDA Food plan (linked in BR’s article) reveals 16 different family sizes, the April to April % increase for each was anywhere from 4.4% to 5.4%, so how does the BLS get 3.9% ?

    Oh a big by the way, that CPI food at home was 1.7% y/y in January, now at 3.9%. That’ll be hell on wheels for the GDP price index in the second quarter.

    Anyway the only possible way the CPI can print a 3.9% after USDA prints a 4.8%, it means category slippage. Those usually eating in the liberal plan $9 a day, are moving to the moderate plan $7 a day, or to the $6 a day, or the “Thrifty plan” at $4.70 a day. Gotta love that name.

    In other words, in order to feed that beast of a SUV, folks are not feeding themselves as well, it’s a strange substitution, but there you have it.

  45. Kevin Dangoor commented on Jun 7

    While it may still count as inflation, I’m curious what impact the increased purchases of organic food products has on the average prices of the goods. Organics are more expensive (just about anything in a Whole Foods is more expensive than what you’ll find in Wal-Mart), and they’re spreading to more and more grocery stores.

    So, when counting the price of milk, is the comparison conventional vs. conventional, or are organics considered in there, too?

    (I’m sure that only a minority buy organic, so the impact is probably minimal, but I’m curious nonetheless…)

  46. Fred commented on Jun 7

    Barry…how do you account for the low Inflation spread on Tips?…please.

  47. Declan Fallon commented on Jun 7

    You could tack on an additional 5-20% of those listed costs if living in Hawaii.

    Maybe it is time to short lettuce



  48. almost died laughing commented on Jun 7

    I find that cereal comes in packs that are too big. It always goes stale before I finish it. I welcome a move to smaller packs.

  49. Fred commented on Jun 7

    I personally find it interesting that on a day when the bond market sent grins to the inflation bears, Gold tanked 11 bucks and the CRB was virtually flat. It’s time for thoses bears to salute Goldilocks…not gold.

  50. wunsacon commented on Jun 7

    Don’t worry about food-driven CPI. Bush can always solicit Jesus Christ — “I call him ‘Jesus'” — to come back to multiply the loaves and fishes.

  51. Quantitative Contemplations commented on Jun 7

    Inflation and the Fed

    I agree with Barry regarding the many pundits, traders, and investors that have convinced themselves that there really wasn’t a reason to worry about inflation (just look at the stock market action of the past few months), but I disagree that many Fede…

  52. Bob Brooklyn commented on Jun 9

    There’s a four-letter history-based word for “Just following orders”-types like Bernanke, BLS, Lereah, et al.: Nazi.

  53. The Big Picture commented on Jun 9

    It’s A Low, Low, Low, Low Medium-Rate World

    I would be remiss in my duties if I failed to point out that this recent run up in yields — fundamental explanation here — occurred a few short months after the cover of BusinessWeek declared: It’s A Low, Low, Low, Low-Rate World Back in November, I …

  54. Ron Sen commented on Jun 9

    Clearly, somebody could design demographic-based inflation data. For example, my major cost as an individual (college tuition) has inflation in the 5-8 percent range, and as a business owner is similarly around 5 percent (insurance, employee salaries, technology mandates-electronic medical records).

    But my pro forma ‘standard of living’ improves, because I no longer pay any moonlighter costs, I just work an extra sixty hours a month…

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