This morning, we have two interesting economic data points: Personal Income & Outlays, and the University of Michigan’s Consumer Sentiment reading.
The related theme throughout all of this is Inflation. It is the thread that runs through the tapestry of the economy. The interconnected psychology of the populace, the behavior of consumers, the revenue and profits of corporate America and therefore the equity markets, are all hanging on the Inflation factor.
It has to be one of, if not the single most influential economic factor these days.
The US lags the world in what Bill King terms "Inflation Angst." King blames the CPI’s lack of correlation with the real world experience of consumers. The rest of the globe is teeming with inflation angst. When we look at other official inflation measures, we understand why. Russia and China are running double digit inflation; Most of European governments are measuring inflation at 5-7%.
Only the United States, with our debased currency and our enormous twin deficits — balance of trade and fiscal budget — has moderate inflation under 3 4.2% (see chart below).
Funny how that happens.
But the man-in-the-street is all too aware that the official inflation data fails to reflect their real world experiences, their actual cost of living increases. They understand that their wages are failing to keep up with prices.
But its more than a bunch of whiny consumers, vicious, lying short sellers, pajamed bloggers — and PIMCO’s Bill Gross — that have recognized the absurdity of our inflation rate. Even the IRS has finally thrown in the towel:
"The Internal Revenue Service today announced an increase in the optional standard mileage rates for the final six months of 2008. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
The rate will increase to 58.5 cents a mile for all business miles driven from July 1, 2008, through Dec. 31, 2008. This is an increase of eight (8) cents from the 50.5 cent rate in effect for the first six months of 2008, as set forth in Rev. Proc. 2007-70.
In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2008. The IRS normally updates the mileage rates once a year in the fall for the next calendar year."
As the table below shows, deduction of gasoline expenses was 44.5 cents in 2006; this deduction increases to 58.5 cents by year’s end. As measured by the IRS, we have a 32% rise in energy costs over two years.
The IRS measure of energy inflation is far outstripping what the BLS has stated is happening with fuel prices. No seasonal adjustments, no hedonics for better, cleaner, ethanol tinged fuel — just a whopping big price increase.
How is it that the government division in charge of collecting money has a better handle on Inflation than then the government department in charge of measuring inflation?
>
IRS Mileage Deductions
courtesy of Fleets & Fuels
>
UPDATE June 27, 2008 9:26am
The Bespoke Boys have this spot on table of global inflation rates:
click for detailed view
>
>
Sources:
IRS Increases Mileage Rates through Dec. 31, 2008
IR-2008-82, June 23, 2008
http://www.irs.gov/newsroom/article/0,,id=184163,00.html
Fleets & Fuels
March 27, 2006
http://www.altairnano.com/documents/ElectricVehicles_FleetsFuels.pdf
~~~
I just had a list of global inflation rates from a recent news article — and now I cannot find it.
If anyone can point me to it, it would be greatly appreciated!
We neeed to stop beating around the bush and call this blatant manipulation of information for what it really is: Corruption.
It’s how banana republics run their business, not advanced modern democracies.
It mirrors the situation in Mexico prior to its financial meldown in 1994, as described here by Carlos Fuentes:
“The country was threatened with an acute case of schizophrenia. A minority centered their lives on the New York Stock Exchange, and a majority on the price of beans. One economy was all gilded wrapping paper, the other all huts and untilled land. The former was the minority’s, the latter the majority’s.”
I would not call our fiscal and account deficits as “huge”. Our fiscal deficit as percent of GDP is actually not that bad when you compare it to historical standards.
The budget deficit stands at 2.4% of GDP.
The account deficit stands at 4.9% of GDP.
Here is a chart comparing our deficits with other countries for some perspective.
http://www.economist.com/markets/indicators/displaystory.cfm?story_id=11647006
The problem is not with the deficits. Its with the rates. They have to rise and until they do commodities have no reason to move lower.
Ah, but Roman, when you cook the inflation figures, you cook the GDP figures too.
At some point equtities act as an inflation hedge. I don’t think we are anywhere close to that point.
Look at the chart of Zimbabwee’s equity market.
http://ftalphaville.ft.com/blog/2008/06/23/13987/the-mad-market-of-zim/
The market value in Zimbabwee dollars was 1420 in January 2005.
By last Friday it had risen to 5,418,000,000,000.00!
If you take the charts at face value, you will notice than it is flat in dollar terms. So the equity market has acted as an inflation hedge.
Just an interesting example.
Isn’t the mileage rate supposed to be an allocation of the full costs of operating a car…maintenance, depreciation of original purchase cost, etc…rather than just fuel costs?
If this is correct, then it is an inflation indicator for the overall costs of personal auto transportation.
Inflation angst? Just saw this morning that core-blimey PCE came in at +0.1% … same as it always does.
I swear, we could have Zimbabwean-style inflation, 30% per week, and core PCE would STILL come in at 0.1% … same as it always has.
Core PCE is yet another poisoned legacy of the Greenspan Bubble era. As Jimmy Carter said, life is not fair. Charles Ponzi, a small-time Bubbler in Boston, went to prison for his postal coupon shenanigans. While Alan Greenspan, who Bubbled the entire planet with his unbacked peachbacks, retired a millionaire.
Of course, if you believe in reincarnation, then John Law, Charles Ponzi and Alan Greenspan may be the same soul, recycled under several identities. And Ben Bernanke, I suspect, may be the reincarnation of Wrong Way Corrigan.
Run, Ben, run! Oops, not that way!!
Roman—–The average deficit over the last 5 years has been over %5 of GDP and the national debt has ballooned up to 9.4 trillion or 70% of GDP. Now add in the unfunded 50 trillion dollars of liabilities and you have the cause for a sinking dollar, which is causing inflation big time. When your currency is backed by nothing but faith, acting financially reckless is a recipe for economic disaster.
CNBC had a great debate on commodity pricing and explained a lot of how oil prices remain high. Rick Santelli, didn’t get it, though. Here’s what he didn’t understand for those who were watching.
When oil contract expiration approaches, contracts in future months are shorted, and contracts in current month are bought. This keeps near term pricing pressure up and chases away the shorts.
This keeps the pricing bias upwards. Huge volumes of cash promote asset inflation and provide buyers. Prices in future months are higher than they otherwise would be due to the oceans of money in the market. Contracts are closed out at high prices because this is the only game in town. Buy high priced oil or no oil.
Pricing memos add fuel to the fire by playing on emotions. This causes prices to rise, which probably attracts more money, which probably buys the future oil sold short.
The keys are chasing away the real shorts who bet on lower prices on expiring contracts AND attracting new money to buy the future contracts shorted at high prices.
This cycle will continue until new money stops entering the market. Closing the loophole that allows investment banks to bet in the same way as commercial interests, forcing them to invest as lowly retail traders will do a lot of the heavy lifting.
If collusion is involved in the future months short sales, then this would only help keep prices high.
In outline form …
1) Sell oil in a future month at the current or higher price.
2) Buy oil in the expiring month at a dip.
3) Issue a pricing memo
4) Sell at the recently bumped up price.
5) Chase away genuine shorts who bet on a price fall.
6) Use the hype to attract even more cash so next month can be even bigger than the last one. Use some of the new cash to inflate asset prices.
7) Repeat.
While I agree with your take on the inflation dissembling, I also understood the IRS’ “rate” to reflect TOTAL operating costs of a vehicle, not just fuel.
One can make the case that all OTHER operating costs have remained constant since 1980 (or any other year,) but that is shaky–as the cost of motor-OIL has also escalated. (Etc., etc.)
global inflation from bespoke
is this it?
http://seekingalpha.com/article/82217-global-inflation-rates
Barry:
Don;t know where to leave this comment so I’ll leave it here. Longtime reader and love your work. But what’s up with your site. When I go onto it it takes forever to download so I can read it. My only guess is that you have so much stuff linked together it takes so long. Maybe you should unlink some things. Only saying this cause I enjoy your work. Anybody else, I would just go away.
best
Steve B.
I’ve recently read several books on commodities and options. I don’t have a visceral understanding, but I’m starting to understand the picture. It’s complicated.
I’m not surprised that most people prefer to believe the less challenging explanation of ‘peak oil’. It has the illusion of being intellectual, there is a small factual basis, the oil thieves don’t mind because it provides cover in case the police come sniffing around, and it’s mainstream so you don’t sound like an oddball who swims upstream. Being a lazy intellectual is the most common reason, I suspect.
Barry,
Angst, for sure, but not about inflation. Rather, it’s about jobs, no savings and too much debt.
Inflation “angst” is when people have the overwhelming conviction that if they don’t get it right now, they will pay more, perhaps a lot more for it tomorrow. We have certainly had that in the past, but not now.
The soaring price of gas and food just adds to the sense of helplessness out there. You don’t hear anything about hoarding these things. It’s more of a “what else can go wrong” psychology.
Rod
downsouth – Thank You. Banana Republic is an apt description across the spectrum of this country’s behavior. From the economy to the law, the military to the health care system – it’s one giant kleptocracy.
The economy is where the rubber meets the road in the shortest real-term effect. Losing the 4th amendment, torturing “other people”, these are longer term cancers. The market is a potential heart attack and they are working beyond overtime to delay it’s effects (stimulus!) and hide its reality. Because these are the conditions that lead to complete overturns in power structures.
“Banana Republic is an apt description across the spectrum of this country’s behavior.”
And after China and the rest quit buying our debt along comes the IMF and says, Banana Republic, cut spending and raise taxes – drastically.
That day is coming sooner than later if we keep saying we can’t sell Chevron, the Ports, Bud, to buyers with money.
Smaller tier central banks are moving to combat inflation pressures, with tougher monetary policies. The Reserve Bank of India (RBI) raised its key lending rate by a half-point to 8.50%, it’s highest in six years, and increased the ratio of deposits banks keep with it by 50 basis points to 8.75%, to fight inflation, now raging at 11 percent. The Bombay Sensex index fell below 14,000 points for the first time in 10-months, after the RBI tightened it monetary policy. The Indian stock market has lost more than 30% in 2008, one of the worst performing Asian indices this year.
Beijing lifted retail gasoline and diesel prices by 18% last week, the first hike in eight-months and biggest ever one-off rise, which could push the overall inflation rate to 9% next month. A week earlier, the People’s Bank of China (PBoC) hiked the bank reserve ratio by a full-percent to 17.5%, soaking up 422 billion yuan, and knocked the Shanghai stock market 14% lower over the next four-days. “Surely higher energy prices will put some pressure on the CPI, so we may need a stronger policy against inflation,” warned PBoC chief Zhou Xiaochuan on June 20th.
Brazil’s central bank hiked its overnight Selic rate by a half-point rate to 12.25% on June 5th, to bring inflation down from a two-year high in Latin America’s commodity powerhouse. The latest half-point rate hike pushes the real interest rate, adjusted for inflation, to 7.25%, the highest among the world’s 52-leading economies. On June 19th, Brazil’s central bank chief Henrique Meirelles signaled a third rate hike, to bring inflation down from a two-year high in Latin America’s largest economy.
Futures contracts in Sao Paulo project a 1% Selic rate hike to 13.25% by year’s end. “It’s necessary to slow domestic demand in order to balance the whole equation and to avoid the pass-through of the wholesale price increases as a result of the raw materials component to retail prices,” Meirelles warned. Inflation in Brazil climbed from an eight-year low of 3% in March 2007 to 5.9% in the 12 months to mid-June, and above the bank’s 4.5% upper target for a sixth month.
Brazil’s central bank expects the inflation rate will accelerate further to 6.3% in the third quarter of 2008. The Brazilian real strengthened to 1.591 to the US$, a nine-year high, and is +9% higher this year, the biggest advance among the 16 most-traded currencies against the dollar. The central bank is utilizing a stronger currency to hold down import price inflation, and appears to be adjusting its overnight loan rate in reaction to trends in global commodity markets.
South Africa’s central bank hiked its overnight repo rate by 50-basis point to 12%, to counter surging inflation, extending a tightening cycle that has lifted the lending rate 500-basis points higher since June 2006, to a 5-year high. South Africa’s CPIX inflation hit 10.4% year-on-year in April, and producer prices are 12% higher. Eskom, the electric utility, is raising electricity rates by 27% due to a doubling of coal prices from a year ago. RBSA chief Tito Mboweni is warning the markets of higher interest rates ahead, and “Yes, it will be painful,” he said on June 23rd.
Pay attention to computer generated notices from the IRS. The IRS computer system can generate hundreds of different notices as it processes through taxpayer accounts. Some of these notices are regarding simple clerical errors. Others indicate a big tax problem looming. Don’t ignore them.
My rather long posting above can be boiled down to one, tired old phrase ….. Ponzi Scheme.
New money pays off the old investors. Hyped prices keep money flowing in. The new twist is the use of commodity index funds, a common roll forward commodity trading strategy, and ambiguous laws that appear to permit it.
The burst will occur when congress closes down specially privileged access by investment banks, and, hopefully, the Feds pick up a few for price fixing. Until then, the Ponzi oil scheme will prosper at our expense.
Barry, the inflation chart does not appear to support your point. If you look at “first world” economies, the US appears to be in the middle of the pack on inflation. The eurozone, for example, is 3.7% versus 4.2%. Do you believe that they are understating inflation as well?
On a recent trip to Geneva , Zurich , Luxembourg , Paris and the UK , for hedgie related marketing biz , every newspaper in those places had articles stating the same point about their inflation rates , and how their governments are fudging the numbers .
Faking economic numbers is another one of our great exports …
Barry: You say: “The IRS measure of energy inflation is far outstripping what the BLS has stated is happening with fuel prices.”
Nope.
According to the BLS’s CPI: gasoline prices have risen 42% since Dec. 2005. The increase in the IRS mileage deduction is 32% (Of course, the IRS deduction includes not just gasoline, but maintenance, wear-and-tear, insurance).
~~~
BR:
Hey Rex: I used a two year example of the changes from 2006 to 2008 (not ~3 years)
Going back exactly two years — to May 2006 -08 — gives me a 27.4% gain (2.993 to 3.813)
“At some point equtities act as an inflation hedge. I don’t think we are anywhere close to that point.” -VermonTrader
Are oil futures being used as a hedge against inflation now?
I kinda like the IRS; instead of worrying about myself, I just enjoy the
misery and pain they cause others.
That calculates out to about 3.0% compounded since 1980. Since 2005 it’s about 13%. Sounds about right. Another useful indicator is the price of a first class postage stamp.
So, another swipe at BLS, and you have three factual errors: that the U.S. inflation rate is 2 percent, that we’re below most of Europe, and that the IRS gas inflation rate is “far outstripping” the BLS rate.
Get a fact checker!
~~~
BR: US CPI fixed above; We are below much — but not all — of Europe, and given the strength of the Euro relative tot he dollar, we should be way above ALL of Europe.
Lastly, the BLS gasoline data for the past 2 years is 27.4% versus the IRS 32% . . .
The inflation misinformation problem is systemic, and most people fail to realize the extent of the propagation of misleading information. For example, the GDP itself is based in part on the inflation figure, and “recessions” are computed based on the change in nominal GDP. If the US was using the more accurate 1990 measure of inflation (which is currently around 7%), we would be well into a recession, which (surprise, surprise) would match people’s actual experiences. Social security is underpaying relative to actual cost of living increases, inflation-protected securities aren’t doing their job when indexed to the CPI, etc.
On the upside, America is getting wise to the scam, and there’s going to be a backlash and a day of reckoning. I predict AARP won’t let senior citizens continue to get fleeced via CPI manipulation, and the correction would be something like 70% at this point. If the Fed is worried about their ability to control inflation expectations now, wait until the public simply doesn’t believe the CPI because it’s too divorced from reality. Bill Gross is on the forefront of investors not buying fixed-return investments paying less than the real inflation rate, which might force the government to make treasuries pay well above the official CPI. Other countries are starting to realize that if they have currency pegs to the US dollar and are seeing 10%+ inflation, something is very bogus.
I think the end of this blatant lie called the CPI is coming.
R Jones | Jun 27, 2008 9:56:51 AM
My rather long posting above can be boiled down to one, tired old phrase ….. Ponzi Scheme.
The burst will occur when congress closes down specially privileged access by investment banks, and, hopefully, the Feds pick up a few for price fixing. Until then, the Ponzi oil scheme will prosper at our expense.
Congress you jest!! as the investment banks are using the commodities market in a effort to recapitalis because the ponzi scheme they used in the mortgage markets is busted and as they outright OWN the congress critters (wannabe pigmen) they will not close the looopholes they created at their masters behest
It may be that facing, say 7-8% inflation but being told by the government and most mainstream media that it is not there is actually scarier than when everyone is openly discussing the actual inflation level.
I don’t think the problem is that the country is being run on lies. It is being run on PR, which doesn’t have any relationship with truth, not even a negative one.
Which is an interesting way to run an increasingly knowledge-centered economy.
A lot of countries have very high inflation. Has it always (i.e. last 50 or so years) been like this, or is it related to the current credit crisis?
There is an exciting new business tool provided by http://www.MileageLogger.com that will help you capture your business mileage automatically, no need for pen and paper. It’s absolutely hands free and all your business mileage records are available online. I think is something that might help you get a bigger deduction since it will capture all your mileage for your business.
Roman’s post nailed it. It seems to me that simple.
The Fed is way too loose and has been for a long long time.
cinefoz,
Just curious, are you short oil?