The Federal Reserve is now in day 1 of their two day meeting. The statement we get tomorrow, and the minutes we will read next month are likely to be intriguing.
Why? The longstanding official myth that inflation is modest, and contained is starting to be recognized for the fraud that it is.
Examples abound: The Times of London: Food-price inflation has already pushed up a typical family’s weekly shopping bill by 15 per cent in a year (Era of cheap food ends as prices surge). Yet here in the US, the BLS has food prices up only 4.5% year over year (that’s with the dollar down ~2% vs. the pound)
The price of rice has increased dramatically in recent weeks due to crop failure overseas and resulting hoarding… Rice has doubled in price in six months. (Bay Area Shoppers Asked To Limit Rice Purchases)
During the first week of April…leisure fares from traditional carriers on 280 major routes rose 13
percent from the previous year…We’ve got an industry that’s in trouble," said Vaughn Cordle, chief
executive and chief analyst at AirlineForecasts in Washington. "If oil prices stay anywhere near $100,
$120 for the year … we’ll have a massive restructuring of the airline industry." (Summer travel headaches loom as airlines’ woes deepen).
All these obvious price increases are begining to undermine confidence int he Federal Reserve. We see article like this one in the San Diego Union-Tribune: The Fed’s inflation gauge isn’t realistic, critics say and this one in Harpers: "Numbers Racket: Why the Economy is Worse than We know."
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Previously
Is the Fed Causing a Global Food Crisis? http://bigpicture.typepad.com/comments/2008/04/is-the-fed-caus.html
Sources:
Era of cheap food ends as prices surge
Steve Hawkes, Greg Hurst and Valerie Elliott
Times Online, April 23, 2008
http://business.timesonline.co.uk/tol/business/industry_sectors/consumer_goods/article3799327.ece
Moms’ new battle: The food price bulge
Parija B. Kavilanz,
CNNMoney.com, April 21, 2008: 10:33 AM EDT
http://money.cnn.com/2008/04/21/news/economy/moms_foodshopping/index.htm
The Fed’s inflation gauge isn’t realistic, critics say
Dean Calbreath
San Diego UNION-TRIBUNE, April 17, 2008 http://www.signonsandiego.com/news/business/20080417-9999-1n17inflate.html
Barry, if you agree with Shadow Stats, you must deduct about 7% from all recently reported real GDP numbers…that would put us in an ongoing deep, dark recession. Yet the S&P trades at 1.4 times sales??? Nasdaq 2times sales??? Historic bottoms are roughly .7 times…that would imply S&P getting cut in half.
Perhaps the myth is less a fraud and more a necessary evil? Yes CPI is high at 4.0% YoY but it was higher a few months ago and it reached 4.7% YoY in Sept. 2005. The Fed says it targets core CPI i.e. ex food and energy. In fairness, isn’t that an appropriate strategy? CPI is only really high because of external supply/demand changes outside of the US. Same goes with food. The FED has no hope of changing that situation by raising rates. If energy prices were rising due to increased domestic demand then by all means raise rates. But that is not the case here. Real wages are trending down in the US so is real consumption. On top of that household savings are negative. How is raising domestic rates going to bring down the cause of current inflation with that backdrop without causing a deep recession? Raising rates to try and bring down CPI now would only deepen the economic slowdown. The reality is that we may be confronting “Peak Oil” and high prices are necessary to get the market to innovate a way out. That innovation is less likely to happen the deeper the economic slow down. The only argument to the FED being linked to high commodity prices is that lower US rates tend to weaken the USD and that net/net lower the price of commodities to countries with appreciating currencies as commodities are priced in USD. Even here though, the FED has limited control. The weak USD is the only thing keeping the US economy from outright recession. Without net exports, Q4 07 would have been negative. So the FED must pay lip service to inflation to both keep expectations down and to prevent a USD freefall that would further exacerbate the imported commodity inflation. But in the end, all they can do is target US rates to domestic demand and that says they might have to cut further.
It’s only when a house is burning that the rodents exit the walls and basement. The rest of the world (pity countries like Ecuador and Panama that have the $US as the official currency) has decided to call our currency bluff. It’s not a passing shower nor a thunderstorm. It’s a flood! So now the fed see’s that we are drowning so they just might come around to saying the relative humidity is going up.
These clowns don’t understand what happens when an entire populace changes it’s outlook from consumerism to penny pinching. That is what’s happening and it will make the world a better place. The credibility of financial leaders is right there with a mafia boss as far as the people are concerned. The fed doesn’t run the show any more. Frugality is back. It may not be as much fun but it’s less disruptive.
John Williams (shadowstats.com) discusses the specific changes in methodology the government has used to achieve the CPI figures it desires. It’s an ineresting read if you have a fancy for numbers and math.
Rising food prices is not inflation; it is a change in relative prices (a terms of trade shock). Farmers are better off (higher incomes) and pure eaters are worse off (lower incomes). Same with oil (energy).
Terms of trade shocks become inflation if the monetary authorities respond to them by trying to increase the price of everything else.
It seems important to recognize the difference between a change in relative prices and a general price increase
Ah, Puzzled. You must be a devotee of Mish, where rising prices are not inflation, heck, rising prices must mean deflation.
You might be right if food prices were the only prices increasing, but the prices of just about everything (except housing recently) priced in dollars has been going up.
It’s clearly inflation (or debasement of the dollar, whichever you prefer) as oil prices have not risen nearly as much in Euros, etc.
What is it, if not too many dollars chasing too few goods? If it were purely supply/demand based price increases, you’d see a similar percentage increase in oil priced in Euros, etc. But you don’t. So, it’s not. It’s inflation, pure and simple.
Steve Barry,
Exactly. In addition, look back to 1998. That moment when our currency went to the moon was a false wealth effect. We were not investing in plant and equipment. We were not creating capital. China was slashing the cost of production! It was like a tidal wave in that first the water receded and we were jumping for joy with all the extra “land” on the beach. Now it’s malthusian competition at it’s most red tooth and claw.
Steve, I can’t take my own cognitive dissonance any more! I need a time machine to travel ahead 6 months to see who is right: you or 3-blind-squirrels.
Dave & Puzzled, you can both be right, huh? I think so.
How many children will cry when they hear their party balloons will not be inflated because “inflation” can only mean increase of money supply…
Hey all, but the Fed’s gonna pause so the world is A-OK and core inflation is only 2%. That’s what CNBS keeps spewing so it must be correct, right? The Fed’s gonna pause is what the public believes, so housing must now be fine and the bottom is in, right? That’s what the public is being fed (no pun intended). The most irrational markets I’ve seen since the .com mania… Utterly nonsensical.
Hi Barry, The US has an energy problem only because its leadership desires to have one. Last night on the Glenn Beck show Gov. Sweitzer from Montana discussed the 200 yr supply of coal that could be converted to high quality fuel at $55 a barrel. He and the Gov. of Wyoming were on the talk shows last year with the same message. Bottom line ” no action by congress except for grain based bio diesel.” That has resulted in not only high gas prices but also high food prices. A prequsite to a change in energy policy must be a change in our leadership in Washington. Only then will we get inflation under control.
Barry,
I sympathize with William’s analysis, but that chart is suspect.
The reason is the difference in inflation rates appears to be constant. Given that Williams is correcting for substitution, hedonics and other time-variable effects, how could this be?
So it seems to me Williams swagged the initial understatment of inflation and kept it constant over time. Maybe it was more than a swag, but does he have access to the raw, unadjusted data from BLS? Probably not.
If he’s confident in his understatement calculation, that’s fine; however, charts like that one imply a level of precision in his adjustments that he likely does not have.
Sometimes I think Williams does more harm than good because his constantly-negative real GDP argument is easy to dismiss. Can’t someone do a better job of estimating the impact of all the CPI changes?
Rising food prices are confirming a cycle that’s been developing since at least the mid-90’s.
Credit creation (eg.M3) has been inflationary, but hasn’t shown up in consumer price inflation because it’s been hiding in asset prices. This first showed up as a bubble in long duration assets (esp. speculative equities). As that became unsustainable by money flows, a bubble developed in medium duration assets (esp housing). As that became unsustainable by money flows, a bubble developed in short duration assets (commodities).
If this simple pattern holds, and cash flows into short duration assets stop supporting values there, it follows that the next bubble may develop in very short (zero) duration assets. A zero duration asset would be one in which the value of the asset is extracted essentially contemporaneously with acquisition; in other words, a consumption good. This will finally move the needle on CPI (even the bastardized versions), PCE, and so on.
As the pig of asset prices moves through the python of the money/credit duration complex, money will likely be created to accomodate the bubble in consumption goods (and the maturation of both credit and utility associated with the past longer duration asset bubbles).
If so, once the money accomodation becomes clear, longer duration credit pricing will adjust upward to reflect the higher inflation expectations, which will press long duration asset prices down, and begin the cycle once again.
The key to understanding this is in the notion of inflation building in asset prices of diminishing duration. In my humble opinion, it’s by ignoring asset prices that monetary policy sometimes appears to fail and becomes pro-cyclical
The wordsmiths at the FED can BS it all they want, but when push comes to shove on rising prices,
-People have to call it the cost of living
-Businesses have to call it the cost of business
Both are getting squeezed hard and have been
(that is why there is so much debt and financial shenanigans going on)
As for the airlines, they are next on the bailout list. (Again)
>What is it, if not too many dollars chasing too few goods? If it were purely supply/demand based price increases, you’d see a similar percentage increase in oil priced in Euros, etc. But you don’t. So, it’s not. It’s inflation, pure and simple.
You are arguing over semantics, which is silly because the situation is so unique it deserves to be bantered about at a meaningful level.
The value of the dollar has gone down, I think everyone agrees to that.
Has the money supply really increased, though? I don’t see how. The credit markets are frozen. The fed tries to give money away, but it doesn’t go into circulation the way it is “supposed” to when rates are lowered. For example, at the last rate cut the banks *raised* mortgage rates and withdrew helocs, raised credit card rates sometimes 10%… aren’t those a defacto shrinkage in the money supply to consumers?
Pearson, if you actually went to shadowstats and looked at it you wouldn’t have to wouldn’t have to work so hard cluelessly suppositioning.
http://www.shadowstats.com/
Graph starts out at 3.5% difference and ends at 4.2% difference.
And of course he has access to the underlying data. Most of it is public data. Why in the world would anyone go to the trouble of computing alternate indexes without that?
Correction: 2.5 to 3.2 (it’s the astigmatism, makes thin lines hard to count)
I’ve just had a 85% increase in my home owners insurance, I live in coastal CT. Essentially we’re paying for Katrina and Florida’s hurricane problems however they try to spin it. Health insurance rose about 10%, Food is up around 15%, gas around 60%, airfares around 15%, Heating oil 80%, Clothing/footwear about 5%, eating out about 12% as far as I can tell. My kids are long past school but friends tell me it wa up about 10%. What for normal life, liberty and the pursuit of happiness have I left out. To anyone who isn’t a total doofus it’s obvious the 4.4% cpi figure is nonsense. That’s why were seeing the plethora of attacks on the integrity of the numbers. I don’t pretend to understand the arcane models they use but as my little set of examples demonstrates they are bilgewater.
In the Real Ecomony (TM) inflation is rampant.
In the Real Economy (TM) when everything we buy costs more and we’re making the same amount of money, we define that as “inflation”.
Those in the False Economy of government statistics and endless acronyms may have differing definitions, but even they know it is just semantics.
Cheers from Reality,
E.
Darkness,
Nowhere in the website did I find a reference to manipulation of raw CPI price data. Its clear that the differences in the measures result from the compounding of a one-time change in methodology:
“Once the system had been shifted fully to geometric weighting, the net effect was to reduce reported CPI on an annual, or year-over-year basis, by 2.7% from what it would have been based on the traditional weighting methodology. The results have been dramatic. The compounding effect since the early-1990s has reduced annual cost of living adjustments in social security by more than a third.
The BLS publishes estimates of the effects of major methodological changes over time on the reported inflation rate (see the “Reporting Focus” section of the October 2005 Shadow Government Statistics newsletter — available to the public in the Archives of http://www.shadowstats.com). Changes estimated by the BLS show roughly a 4% understatement in current annual CPI inflation versus what would have been reported using the original methodology. Adding the roughly 3% lost to geometric weighting — most of which not included in the BLS estimates — takes the current total CPI understatement to roughly 7%.”
http://www.shadowstats.com/article/56
I agree with David — the main diff between the pre-1983 method and the post-1983 method is that they switched from home prices to OER. So now that prices are declining (where they were previously skyrocketing), shouldn’t the spread between pre-1983 and post-1983 be tightening in a big way, or possibly even going negative?
I’m very sympathetic to Williams’ goals but I just can’t make sense of his data — what am I missing?
Estragon,
Exactly. The inflation has popped out of the housing bubble (and before that the dot com bubble, and before that the little housing bubble) and is now back into our energy and food and such.
Inflation is no better or worse than it has been for 20 years- we just started measuring it differently to lie to ourselves about it.
It would help if we stimulated the economy to actually produce products instead of asset bubbles. But the very rich can’t benefit that way, since they would actually have to pay people to do that.
The “shadow stats” are a fraud. They just add some number onto the current stats – the same number every month. It’s meaningless.
Turns out the Fed’s inflation guage was manufactured in China – it’s not really a guage, only a tube with the number 2.2% painted in with lead-based paint.
Darkness – I see your point, but the point some here are trying to make is that the money supply had been growing rapidly, and had been going into assets. Not now…
We have been exporting our inflation, but now the world is not so anxious to hold U.S. debt-notes so is dumping those declining dollars into hard assets instead of reclycling them into treasury notes. This is crack-up boom behavior – commodity preference over currency.
And that will lead to the next hatch to fail on this sinking sub – lower and lower bids to cover just at a time when the Treaury shortfalls are increasing – higher yields are on the way.
The wheels are coming off this clunker, I would guess about one more good backfire ought to have the wheels collpse and the whole thing drop into a worthless heap.
“We would have had to take a boat from here anyway.” – W.C. Fields, The Bank Dick.
My take on all of this is pretty simple- we are in stagflation and will be for years, probably punctuated by global shortages of all kinds of basic stuff some of which may be contrived. I can’t think of any reason why you would want to save money beyond whatever you think a safe “oops, I got laid off” reserve might be. Then again, I don’t see where “investing” in equities pays off other than to trade in and out on a regular basis over the next couple of years which isn’t really investing.
What’s interesting to me is that while I envy you 30 year old kids who don’t actually have to care whether your 401k recovers within 10 years after whatever happens happens while I do, a lot of you have never been kicked in the nuts by Corporate America before, are badly over-leveraged by houses and SUVs, and are just as vulnerable to price hikes as the Mexican who groomed your lawn last week. If things go as I expect, you may be in for a humbling experience in due course which is probably a good thing in the long run.
==whipsaw==
Again, it’s not $168B “tax rebate”, it’s a mortgage loan against our future tax debt, fully-secured by our SSTF, which is fully
secured by the “faith and credit” of same
loan company forcing this mortage on US!!
And the Feds want US to just party it away!!
I know, my head hurts too…. No government
spending was cut back, in fact, it’s been
deliberately grown the fastest in history,
more and more gone to outsourced investors.
Our Republican loan terms?
According to BLS, SAID and Census, there are ~129.9M qualified working adults, civilian and military, and 42.9M qualifying children.
So that’s a total of 172.8M checks.
The maximum rebate amount is $300 per check.
The total of rebate payments then is $51.8B!
That’s an origination fee skim off of 70%!!
Then we pay a 4.25% prime, plus 28% income
tax, plus 20% US$ devaluation on the entire $168B principal, basically forever, right?
An effective loan interest rate of 174%!!
And you thought credit cards were usury!!
What if Treasury forces $3T rebate on US?!
Oh, wait, that’s the 2009 Federal budget.
Mish is allowing at least that past inflation has been “stored” in other prices than consumer goods and is now showing up in those goods as other locations for money are becoming undesirable and the inflated (past not present) money is rushing into commodities. This makes sense. There hasn’t been as much recent money inflation as there has been recent price inflation. But there has been as much total inflation, just most of it was hiding in places other than commodities. But as credit collapses, a lot of this sloshing money/credit can evaporate. We are just in a period where it isn’t obvious what hole the money will flow out of and it isn’t at all obvious that more will evaporate than has poured in from where it was hiding. The verdict is out on whether Misean deflation will mean CPI deflation before is all said in done. None the less, everyone should understand both.
Geez, I wonder what inflation is using the methodology from 1935? Probably 34%. Seriously, though. Can you compare the methodology from different eras beyond 1983? How did going off the gold standard affect inflation? If we are gonna go back to previous methods of gauging inflation, why not go back to the earliest methods used? I don’t know where to find the methodology used in 1998, or 1983……….let alone 1934. My point is, at some point……… these changes eventually produced a way of measuring inflation correctly – can economists agree on it? and what would it include. How do we know the methods used in 1983 aren’t too low also?
Terrence Michaels … wow … huuuummm
never occured to me they would borrow more than they need to issue (as a supposed helping hand)
I called in to a radio talk show with an IRS agent as guest, and asked if the big banks bid for that money and if he knew the interest rate they got. He didn’t.
Interesting rundown on that borrow. My mind is reeling again.
(I wrote this couple days ago)
sorry Fred,
whipsaw, this is just a fantasy
hum … a riotous revolution – that would be just dandy.
No election, no account withdrawls, no enforceable pension contracts, infrastructure ripped up and then replaced on some scale, death & murder on such scale that insurance contracts become null and void … sounds like a plan for the _________________.
I can’t fathom how property would be defended and ownership extracted in such times.
Come 2020 we can rebuild the north american continent better than before.
This chart tells us there is NO inflation!
At least, it tells us by ANY measure, inflation in the last 12 months is about 1% greater than inflation was in 2001.
And within about 2% of most of the last 8 years.
Now you all don’t actually believe it has been running at 10% for the last 8 years, do you?
M
Are US Inflation and Employment Underestimated?
Hard Numbers: The Economy is Worse than You Know [full article for Harpers subscribers