Reports of the Death of Inflation Have Been Greatly Exaggerated

With the FOMC meeting tomorrow, equity traders are hoping for a half point rate cut.

According to Barron’s Econoday, the Fed Fund Futures are pricing in a "42% probability for a 25 basis point cut versus 58% for a 50
basis point cut from the current target of 5-1/4 percent, based on fed
funds futures close on September 14."

Grain_tyson_200709A key element of the Punch Bowl Caucus — those millionaire billionaire fund managers begging for a cut — is that inflation, if not already tame, will become so as the economy cools. The obvious criticism is that these are the same folks who have been telling us for many months that the economy is just fine (therefore you should buy U.S. equities).

Now, as their prior arguments have proven to be hollow falsehoods, they have traded them in for this year’s model (Hurry in for great deals on 2007 models!). In place of the former rhetorical argument, their new position crossover argument is that the economy is slowing, the Fed must cut rates (therefore you should buy U.S. equities).

My preference is for objective analysis, and I take the shill-driven spin as what it is: Biased, self-promotional spin by (mostly long only) shills for their firm’s asset gathering business.

My own agenda is similar: we run a fee-based asset management business, but prefer to find an "objective Truth" about the economy. Maybe we are too small to be corrupted by the system. Perhaps we simply find it easier to approach it this way. Regardless,  what we continue to find is that inflation remains "sticky" — even as the economy cools.

Why do we say that?

-Oil is near all time (nominal) highs of $80 (Crude Closes at New Record High)

Gold Advances to Near 16-Month High (Gold is well over $700)

Health-Care Inflation continues to gain at double digit levels

-Corn hit over $4.50 last week February

Wheat is near $9/bushel

Soybeans Rise to 3-Year High   

Natural Gas, Orange Juice Soar

Dairy prices have almost doubled from 2 years ago

There are lots of other examples, but these are the most recent ones that come to mind. And, the Fed is well aware of these issues.

That’s why a 50 bps cut would surprise me.

Goldman Sachs Agricultural Index


Higher Prices. It’s What’s For Dinner.
David Gaffen
Marketbeat, September 5, 2007, 10:57 am

Health-Care Premiums Climbing Faster Than Inflation, Studies Say
WSJ, September 12, 2007; Page D9

Tyson’s Grain Costs Trickle Down
Forecast Is Lowered; Restructuring Plan Will Reduce Ranks
WSJ, September 6, 2007; Page A4

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What's been said:

Discussions found on the web:
  1. REW commented on Sep 17

    I think David Malpass (who has flip flopped from calling for hikes to expecting a cut) noted that government inflation statistics are set to POP higher in September on a year over year basis, due to what happened in 2006. Will the Fed cut 50 bps only to have CPI reported at 4 or 4.5% a week or two later? Doubtful.
    Inflation is real as BR notes, and rising in my opinion. However, raising and lowering the FFR target to control inflation is perverse and ineffective. They should cut rates based on the outlook for growth. If rate cuts can spur some growth, it will more than soak up the excess liquidity that is driving gold, oil, agriculturals higher.

  2. OldVet commented on Sep 17

    Keep your eyes on Europe in weeks ahead, it may be from there we find a triggering event such as bank failures that sweep aside petty Fed decisions on a quarter or half point of interest. Forgotten in the mad rush to parse the US economy is the following: there is a worldwide housing bubble, and it’s more exaggerated in several countries like the UK and Spain and India and China than it is here.

    Likewise, businessmen in those economies are looking at the causes of the US meltdown and finding either pockets of the same causes, or widespread practices that resemble US lending practices. I hope nobody thought greed was dead in the rest of the world. Better not ignore it either.

  3. VennData commented on Sep 17

    All this economy needs is a little surge (don’t worry if you’ve been a “get gov’t off my back” type, what you would rather have: billions and the hypocrite label? or not?)

    I’m talking top marginal tax cuts. They worked so well last time until they stopped working, right?

  4. Marcus Aurelius commented on Sep 17

    “…I’m talking top marginal tax cuts. They worked so well last time until they stopped working, right..?”

    Posted by: VennData | Sep 17, 2007 9:13:44 AM


    I agree – but only for those who make over $250K/yr. Maybe we should also default on our national debt and move all US government offices to Dubai.

    Wanna’ buy a nice house?

  5. Stuart commented on Sep 17

    There’s little the Fed can do to affect agricultural prices. More people eating better = supply and demand pressures. Inflation is a monetary phenomena. Too much money. Rising prices is NOT inflation. It is only A symptom of inflation as prices can rise for many reasons. Just like oil. Am a believer in peak oil so again, there is very little the Fed can do there as well.

  6. dblwyo commented on Sep 17

    Another thing to add to the stew of relatively s.t. inflation indicators. Since Volcker with Reagan’s political support broke the back of inflation the early 80s, at the traditional pound of flesh price recession-wise, we’ve enjoyed a secular decline in interest rates and inflation/expectations. From here there’s no where to go but up and managing things to avoid re-starting a secular uptrend will be hard, painful and expensive. The implications are going to ripple thru investment, the business cycle and the l.t. behavior of the economy. Ouch.

  7. techy2468 commented on Sep 17

    OldVet…. housing inflation was very high in india in 04/05/06 and Reserve bank of india raised the interest rates to 10%…housing loans are 12%….but house prices are yet to go south (after appreciating 2to 6 times in three years).

    i am not sure that we can have a housing bubble in india with 12% interest rates.

    even if there is a bust….it will be a big loss for the home builders and flippers who are still building million units/year…

  8. VennData commented on Sep 17

    “…in the short term, a Fed cut could give the dollar a boost…”

    — Dan Molinski, “Dollar Could Get Lift if Fed Trims Target’ from ‘Rupert Murdock’s Wall Street Journal’ pp C7, September 17, 2007.

    The Wall Streeters are pulling out all the stops on this one. If a ‘Main Streeter’ said this, he’d be ridiculed… if any Democrats said this… they’d be accused of being ‘naive’ ‘ignorant of economics’ etc. But when the Wall Streeters and the “Save Bush’s tax-cut-based economy’ crowd say it, it’s OK.

    The Bush crew are Keynesians in drag at the Debt & Deficit Cabaret.

    (oh yeah… the deficit’s going down! er… a.. well… if you don’t include Katrina, Afganistan, Iraq, and sundry other off budget items.)

  9. Estragon commented on Sep 17


    The fed CAN affect the price of food.

    If they cut rates, the USD will be cheaper than it otherwise would be, at least with respect to floating XR’s (eg. CAD). That means that either US prices rise to the XR adjusted CAD level, or the CAD prices drop to XR adjusted USD level. Since supplies are tight and demand (especially in Asia) is growing, odds are that the US price rises.

  10. Stuart commented on Sep 17

    Estragon, agreed. I was referencing more the broader macro effects brought on by supply and demand pressures for consumables as ultimately the primary driver, but you make a good point.

  11. Red Ocean commented on Sep 17

    What source did you use for the corn price? Near month corn futures (Dec 07) are $3.50 and going into 09 you can get up to a little over $4.00. Dec 07 contracts peaked out at 4.30 in mid June but Corn has been down to tame since then.

    The other commodity inflation figures are real and even at $3.50 corn is considerably higher than it was a year ago. But the $4.50 number does not appear to be accurate.


    BR: Oops! My bad — that was February, not September. I’ll fix it up top

  12. Linda P. commented on Sep 17


    As a first timer to Vegas, really hoping that you do a post that fleshs out your experience. I’m sure your firm has looked at g*mbling stocks as a sector play, so also curious about any impressions there too.


    Linda P.

  13. scorpio commented on Sep 17

    why mainstream economists have stood by and failed to point out the inflationary impact of 1) massive deficit spending, and worse according to Samuelson MILITARY spending, 2) the collapsing US $, is beyond me. i guess the mainstream has shifted so far Right that any criticism is verboten

  14. michael schumacher commented on Sep 17

    And right on cue (the day before the fed decision) and ML has to announce job layoffs at it’s mortgage biz… that is ANY surprise to anyone…..the timing is just too suspect.

    Trying a bit too hard to game this decision as it was all contained up to this point and now it suddenly is not when the brokerages stand to benefit the most?

    Expect a few more announcements of layoffs today and into 2pm tomorrow.

    Add in the games being played with the oil patch and it all adds up to the brokers “demonstrating” that a rate cut is necessary to “save jobs”. When the entire float of a stock turns over in a day the SEC launch an investigation however in the oil pit it’s described as “active trading”. That’s exactly what has happened with oil futures last week…..all the trading and most of the contracts that trade will be canceled way before any of that oil is “delivered”….Like we have anyplace to store 290 million barrels of oil in a given month. But our market allows these to be traded and then canceled (when the contract is about to be up ) and then reported as a shortage in the inventory…

    Nice trick they are allowed to play…


  15. Aaron commented on Sep 17

    I completely agree. A 50 basis point would be rather surprising from a Fed that has pointed out how large the inflation risks are. More likely is a 25 basis point cut that speaks of the possibility for more.

  16. Steve commented on Sep 17

    Hilarious. Did you even bother to read any of the articles you linked to in your “objective” analysis of price levels?

    My favorite is the WSJ article you linked to:

    The title of the article is:
    Natural Gas, Orange Juice Soar on Threat of Storms

    You shorten it to:
    Natural Gas, Orange Juice Soar


    More: Tropical-storm jitters sent natural-gas and orange-juice futures on a tear in New York.

    Oh, but there’s more! The soybean article is titled:
    Soybeans Rise to 3-Year High as U.S. Crop Faces Frost Damage

    Whew! That long title is too hard to read. Thank god you shortened it to “Soybeans Rise to 3-Year High.”

    Where would we be without your objectivity? [BR: Who ever said I was objective?”]

    And of course, the wheat. You say “Wheat is near $9/bushel.” The article title says, “Wheat Price Rises to Record $9 a Bushel on Global Crop Concerns”

    The actual article says: Wheat surpassed $9 a bushel for the first time as a drought in Australia and Canada cut production, pushing global stockpiles toward a 26-year low.

    Keep fighting the man, you truth-teller, you!


    BR: I am writing about the prices — not the rationale that the headline writer chose.

    They are as significant to me as the line “Stocks fell today on profit taking.”

    What do you have to say about the prices of Oil? Dairy? Health Care? Beef? Education? Gold? Housing? Natural Gas? Timber?

    Is it your position there is little or no inflation, only storms, droughts, and floods?

    Lastly, and this is painfully obvious, if I were “hiding” anything, explain why would I put a link to the full article?

    Maybe its too subtle of a point, but the gravaman of our discussion is rising prices — not some half-assed explanation as to WHY these prices are rising.

  17. wunsacon commented on Sep 17

    Eclectic reminded us in a previous post to state our predictions ahead of Mr. B showing his hand tomorrow. Ok then…”my” “prediction” is: no cut but a change in bias.

  18. Red Ocean commented on Sep 17


    It is true the titles were shortened. But his point is about higher prices and inflation. If higher prices are caused by weather related issues does that make them less inflationary? It could make the inflationary pressures less persistent if it can be corrected next year, but its still inflationary now isn’t it?

  19. bsneath commented on Sep 17

    Correction – health care premiums are rising at double the rate of inflation (about 6%), not at double digits. – for what it is worth.

  20. Steve commented on Sep 17

    It is true the titles were shortened. But his point is about higher prices and inflation.

    Red Ocean,

    It’s inflation in the most broadest sense of the term. However, in the context of monetary policy and the Fed, it’s not inflation. What the Fed does on Tuesday isn’t going to impact the weather in Australia.

  21. dark1p commented on Sep 17

    Ah, but what weather in Australia does on Tuesday may end up impacting what the Fed does.

    Isn’t that the real point? That Big Ben and the gang can’t lower too much in the face of the economic context, whatever is causing that context?

    Just saying.

  22. pkts commented on Sep 17

    Hey Steve,

    Wow….Soybeans is up over 3 bucks over the last year and its all because of frost damage over the weekend. Wow…the market truly is an amazingly omniscient discounting engine! You talk about Barry not being objective!

    Soybeans are up due to energy inflation hitting corn and thus beans. Attributing the move to 3 year highs to crop damage in the last three days…well…that aint very objective.

  23. RedOcean commented on Sep 17

    “What the Fed does on Tuesday isn’t going to impact the weather in Australia.”

    True, however the fed actions have never been targeted at supply. The actions of the fed impact demand which then impacts prices. In the context of tight supply demand cannot be allowed to run unchecked or it will increase inflationary pressures. Thats why the supply picture is important irrespective of the causation behind the supply situation. In the near term the reason that supply is tight doesn’t matter when it comes to prices.

  24. Steve commented on Sep 17


    An objective person looks at overall price levels and doesn’t selectively choose the assets that are increasing in order to argue their point.

  25. cinefoz commented on Sep 17

    You are confusing supply and demand price changes with inflationary price changes. Yes, speculators are driving oil to higher highs, but speculation is effective only because oil is a commodity in world demand. Corn is high but ethanol demand is high.

    No level of Fed interest rate changes can cause higher or lower commodity prices of a permanent nature.

    Excess credit availability caused asset based inflation. The Fed helped create that situation. The problem there is over and the Fed needs to react to prevent deflation or recession, depending on how badly they might choose to ignore the problem.

    Go back to basic macro economics. Prices, as you described them, are moving along the supply and demand curves. Inflation causes shifts in these curves.

    Why is it that so many people who should know better consistently confuse supply and demand price changes with inflation?

  26. vega commented on Sep 17

    steve, don’t be a tool. if anyone is fighting the tape, it might be you with commodities.

  27. Chandler commented on Sep 17

    Well given how much corn, soybeans, oil, affect the prices of SO many other products, they are a pretty good indicator (IMO) of present/future inflation.

  28. cinefoz commented on Sep 17

    Chandler, Secondary effects are not inflation. They may be unpleasant to pay, but no level of interest rate changes will affect the price of oil. Thus, secondary effects are also not influenced by interest rate changes. Interest rate increases are effectively a tax on all of us and a drag on the economy if they are excessive … as they are now.

  29. cinefoz commented on Sep 17

    AS much as we all want it to be otherwise, inelastic demand and price gouging are not inflation. Nor are secondary effects related to inelastic demand and price gouging. The Fed can not control that.

  30. F commented on Sep 17


    Are you saying that these secondary effects aren’t inflation? Or are you saying that they are inflation, but of a sort that the Fed can’t control?

  31. F commented on Sep 17

    Reading your last two comments, you have answered my question. So doesn’t this invalidate our method for monitoring inflation (a price index)? And what would you use instead? M3?

  32. cinefoz commented on Sep 17

    All higher prices are NOT inflation, in spite of what the pundits and talking heads on TV and in print claim. Price gouging is not inflation if it is caused by inelastic demand for a product that is in high demand.

    If oil is price gouged and products from oil become more expensive because oil is more expensive, raising interest rates will NOT lower the price of the secondary items because their cost of production is based on the price of oil.

    OPEC laughs at interest rates because people will buy oil at any level of interest rates. Thus, the Fed has no control over the price of oil at any level of interest rates.

    Ditto with other commodities in high demand.

  33. rebound commented on Sep 17


    I think you are getting bent out of shape over nothing. Barry is a straight shooter. You can agree with his opinions or not, but it’s not fair to call his credibility into question. He eats humble pie frequently and it’s a merit of his site.


    My prediction is that Ben will not cut rates. Inflation is high (despite published numbers), and he will try to earn some respect through “tough love”. I think he will wait to see unemployment on Main Street become more tangible before he starts spending ammunition. I’ll go a bit farther. In shock at the lack of a rate cut, stocks will take a short term but well deserved beating, and then we will resume a planet-wide bull market because the rest of the world is coming on line in many shapes and forms.

  34. cinefoz commented on Sep 17

    re how to measure inflation: Beats me. Too many measures in use are flawed. Productivity needs to be related to something that doesn’t jump around a lot due to uncontrollable costs. Also, asset inflation needs to be monitored in some way.

  35. michael schumacher commented on Sep 17

    on the comment earlier

    “but no level of interest rate changes will affect the price of oil”

    I totally disagree as we’ve all seen the effects of access to cheap capital on the stock markets……..are you saying that the cheap money could never be utilized to push up the price of crude oil???

    That is EXACTLY what has been happening in the oil pits in the face of dropping demand.

    You watch oil tomorrow when the rate cut that everyone is banking on does’nt occur and the trade of oil basically falls off a cliff when the promised cheaper money (or the perception of it) fails to materialize and the roaches sell it off as demand continues to slow.


  36. Bonddad commented on Sep 17

    Please stop confusing everybody with your silly reference to agricultural and energy prices as they relate to inflation. Everybody knows now that there are simply transitory price spikes (completely uninfluenced by India and China and their 2 billion people coming on line as consumers or the possibility of global warming seriously screwing up crop growing practices) and they should be completely ignored.

    This email was brought to you by the Bonddad school of sarcasm; sign-up for our 2 week course today.

  37. Sweeny Texas commented on Sep 17

    Stagnant and/or falling wages coupled with rising costs of food, energy, and health care sounds to me like a recipe for a recession, or worse. Doesn’t the fed funds rate usually drop during recessions? I don’t see any other possible outcome.

  38. Steve commented on Sep 17

    Barry is a straight shooter. You can agree with his opinions or not, but it’s not fair to call his credibility into question.

    That’s ridiculous. Tell me, how often does Barry attack those for excluding certain items in inflation calculations. The core inflation rate, for example. I believe he calls it inflation ex-inflation.

    So what does he do in this post? He basically says, “Inflation is high and if you don’t believe me, take a look at this list of items that I selected to demonstrate it.”

    That’s credible? He’s trying to get away with the exact same thing he skewers others for.

  39. cinefoz commented on Sep 17

    somebody said: I totally disagree as we’ve all seen the effects of access to cheap capital on the stock markets……..are you saying that the cheap money could never be utilized to push up the price of crude oil???

    reply: No. This is a supply and demand effect that would not be possible if oil had excess capacity available. However, asset inflation is caused by interest rates that are too low, as in 1%, not 4%.

  40. RedOcean commented on Sep 17


    When did I call Barry’s credibility into question. I pointed out that the price of corn did not hit 4.50 last week and he corrected that to last february, and I argued on his behalf against Steve. Did you read something I said as questioning his credibility?

  41. Barry Ritholtz commented on Sep 17

    Red Ocean was correct — he caught an error, which I acknowledged and fixed above.

    Steve, on the otherhand, apparently believes there is little or no inflation (only droughts and storms) and that I am a liar.

    I’ll let the blog’s truthfullness speak for itself.

    And Steve, please point us to some of your own writings. I’d LOVE to see what analysis you are generating!

  42. karl smith commented on Sep 17

    I deeply hope that rising food prices do not cause the Fed to reconsider a cut. Most of the evidence points to increasing food prices because of declining supply and increased foreign demand.

    The reason we want to exclude food and oil is because these are global commodities in which the US is largely a price taker. Trying to pull down global oil or food prices by slowing the US economy is just cutting off your nose to spite your face.

  43. michael schumacher commented on Sep 17


    You are assuming that the oil producers are completely honest with what they say they produce vs. what they actually produce.

    They have plenty of capacity….take a look at what gains are made on oil in the last half an hour..(ironically it’s just like those days where the S&P got walked up 30 handles in 30 minutes only that goes on EVERYDAY)…and then the slowing (historically) demand curve which just took a turn downwards.

    Come on…..oil has never been about supply and demand….only the wholly misguided perceptions of it.

    IF you have cheap money (and continued access to it) there are NO limits to the price appreciation curve should you want to direct it at a particular equity or commodity. Raising rates would not affect a particular trade one way or the other but it would signify the ending of the appreciation bubble that exists solely because of the cheap money.


  44. rebound commented on Sep 17

    Red Ocean,

    Sorry about that. You corrected an error and I addressed my complaint against the incorrect author.


    There are no issues with Barry’s post. For crying out loud, the source is hyper-linked. How much more transparency could you ask for? That’s almost as good as it gets. Chill and join the rest of the debate.

  45. OldVet commented on Sep 17

    Since prices are the key subject, the rise of world populations by some 2.5% a year requires an equal increase in output to avoid price rises. While population increases, on a global basis, are more or less smooth, you have “lumpy” production in agriculture and commodities. Some of the broad US price rises are due to this mismatch. The pass through of oil costs via farm costs to grain costs to the table are “lags” which are another mismatch.

    However 6% rises in health care costs are most likely oligopoly rents extracted with the complete cooperation of cynical political leaders and the docility of the gullible public.

  46. Commodity Trader commented on Sep 17

    I fully side with Barry. Moreover, I think the Fed should NOT cut rates at all tomorrow and wait for another month of data. After all, one bad day (month) does not a trend make.

    I suggest the following exercise to Barry or whoever cares: gather the prices of several key commodities in 2001, when the last monetary easing cycle started, and compare them with today’s. Nothing fancy: wheat, corn and soybeans, milk, crude oil, copper, zinc and lead. Add then a couple of financial variables like the EURUSD exchange rate and the gold price. And then ask yourself: does this really look like the right time to start easing again?

    BTW, in 2001 the US current-account deficit was 3.2% of GDP. Now it’s 5.5%.

    Lastly, lower interest rates would tend to lower the personal savings rate, woudn’t they? Is it too high now? See for yourself:

  47. whipsaw commented on Sep 17

    wunsacon said:

    Ok then…”my” “prediction” is: no cut but a change in bias.

    I am guessing that you are correct, too many people are leaning the same way on this. Big selloff on Tues afternoon, recovery when they drop the discount rate just before the open on Friday as options expire (again). I wonder what house will be one step ahead of both moves and how they could possibly have known in advance? Ha!

    But it doesn’t matter too much to me, I sold TLT at the tip of the spike last week by some miracle and put half of the proceeds in 90 day CDs and am just going to sit on the rest until this gets sorted out some. Or maybe I will put it all into O.J. collectibles, the manuscript for “If I Robbed Them” would be pretty cool but I am not sure if the research is complete. ;p


  48. whipsaw commented on Sep 17

    cinefoz said:

    They may be unpleasant to pay, but no level of interest rate changes will affect the price of oil. Thus, secondary effects are also not influenced by interest rate changes.

    I am not sure how you figure. In general, dropping central bank interest rates makes one currency less valuable against other currencies and against commodities that are priced in the less yielding currency, like oil in the case of $USD. That’s one reason why interest cuts are inflationary domestically and why interest differentials are the entire basis for the carry trade.

    To the extent that an economy is insular, it doesn’t matter, but to the extent that it is “globalized,” then some bad things can happen. We’ve had “globalized” economies many times before, only they were previously called ages of imperial/colonial expansions, and they typically wind up in devastating external warfare and/or internal revolutions at least in part because of relative currency/wealth issues manifested by mercantilism.

    The point is that when we lower interest rates, $USD based assets are devalued internationally, plus it makes it less sensible to consider $USD a reserve currency which just undercuts its value further. There is not much “secondary” about any of it.


  49. The Man commented on Sep 17

    Another great discussion —

    Please set up more “open threads!”

  50. Fullcarry commented on Sep 17

    It seems too many people still suffer from money illusion.

    When returns on money are negative its natural that people would start hoarding commodities.

    The Feds’ short term interest rate is the key factor determining returns on money!

  51. Ant commented on Sep 17

    An objective person looks at overall price levels and doesn’t selectively choose

    Steve: what commodities are you tracking that lead you to believe we are not experiencing inflation? This is not a rhetorical question, I am sincerely curious.

    Eclectic: As I have since last week, I predict that the Fed will hold, not cut.

  52. Barry Ritholtz commented on Sep 17

    On Post, Agflation!, dated Jun 21, 2007 5:12 PMIP Address, Steve wrote:

    “Inflation is high, but what are we supposed to do about it? I guess you could reduce demand for energy and food by inducing a recession, but that doesn’t sound like an effective way to deal with it. Between the two undesirable scenarios of paying a lot for food and energy or being unemployed, I imagine most would prefer the high prices.

    Also, as soon as the demand recovers from the recession, high prices would return.”

    Why, Steve, I thought you just said there was no inflation! WHat made you reverse your position of 90 days ago?

  53. The Big Picture commented on Sep 24

    Inflation is Dead? Part II

    Last week, we noted that Reports of the Death of Inflation Have Been Greatly Exaggerated. The greenback has been in freefall, and that means the prices we (Americans) pay for commodities just goes higher. A few examples: Oil is at an all-time high, hav…

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