Why the Disconnect: Population vs Pros, part II

As per our earlier discussion: We know health care costs have skyrocketed, that education costs are through the roof, and that Housing doubled over 7 years and has since fallen modestly from those levels (about 15-20%).

Then there are the commodities: Let’s look at a few data points, to see who is less in touch with reality: The gloomy populace, or its Economists:


Goldman Sachs Commodity Index (1978-2008)

via MRCI


One-Year-Ahead Inflation Forecasts, Survey of Professional Forecasters   
(1970 – 2008)

Source: Philidelphia Fed




On an unrelated note, the latest version of Excel for Mac is stripping the dates from the second chart — I fixed it, but I have no idea how — any suggestions ?

Here is the Philly Fed file Download inflation.xlsx:


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What's been said:

Discussions found on the web:
  1. lahke commented on Jun 30

    Try not making it 3-D (it looks a little canted, as though you were trying that).

  2. anon commented on Jun 30

    1. re Mac Excel, there was an update out a week or so ago (6/24) for Office 2004, also for Office 2008

    2. Economist joke seen elsewhere in the blogsphere: Economist and another guy stranded on a desert island, no food for several days. They come upon a few cans of unopened Beans&Franks. Other guy says “Let’s look for a sharp rock”, Economist says “Let us assume a can opener”.

  3. Jim Haygood commented on Jun 30

    How can it be that the GSCI has exploded by a factor of five since 2001, in one of the more prominent inflationary episodes of the past century … while core PCE, according to the New York Fed, has never risen above a 2.5% y-o-y increase since 2001?

    I’m sorry, but that don’t compute. Core PCE is broke, and can’t be fixed. I am hereby unceremoniously chucking it into history’s dustbin. In the absence of any objections posted here, the august poobahs of the FOMC will be presumed to concur.

  4. michael schumacher commented on Jun 30

    Please recall the “jiggering” of said GSCI in August of ’06 and what that ultimately did for the wholesale gasoline markets-just in time for the elections IMO.

    I seem to recall that they have since sold off the rights to it and no longer really retain much control of it……just a pretty name attached to it is all.

    Does paint an interesting picture when compared with the bottom chart…..one must consider the source however…..


  5. Gary commented on Jun 30

    We (the Populace) are so gloomy because in addition to everything that’s been discussed – wars, jobs disappearing, global price pressures, etc. — MANY OF US ARE ONE, SHORT HOSPITAL STAY FROM DISASTER.

    You get downsized from a good paying job with decent benefits to less so with less so. You take a 10-20% pay cut, but your healthcare costs go up, because the benefits aren’t as robust, if there at all. Add to that less job security. Plus almost all of the costs of necessities are going up.

    With little job security, if you get sick for a week in a hospital, you could be crushed because most of us now have 80/20 splits on their insurance – if they have insurance. And laid off to boot.

    The “Professionals” just need to get a clue about some of this stuff. Perhaps if they swapped their six-figure (or even high 5-figure) salary with the typical American’s for a year, they may gain a better understanding of statistics, inflation, and sentiment.

    To get a little more on topic — I wonder if credit is being destroyed fast enough to pop what looks like a terrific commodities bubble?

  6. SteveC commented on Jun 30

    Let’s be honest..the only thing the Fed will pay attention to is our collective paychecks. If those start to grow, interest rates go higher. They’re really hoping they stay flat or down, theoretically pinching consumers, and starving inflation out. Because of the widespread use of credit cards, this may take a while. Sort of depressing.

  7. don commented on Jun 30

    Barry, do you know if the one-year ahead forecast of core or total inflation?

    Also do you have any thoughts on Bill Gross’ comments today that we need to double the budget deficit (to $1 Trillion, say it like Dr. Evil) in order to ward off a mean recession?

  8. mark mchugh commented on Jun 30

    older windows excel (might help)
    right-click on chart -> Source Data SERIES tab – make sure Category (X) axis labels is linked to dates data.


    right-click on chart -> Chart Options AXES tab – make sure Category (X) axis box is checked.

    then, right-click on the x axis and tweak fonts, numbers, until you get the look you want.

    Why diffent right-clicks appear/disappear on the chart has always been mysterious to me.

  9. Anonymouse commented on Jun 30

    Anyone who thinks the worst is over should take a look at the Bank of International Settlement’s latest report

    “The current market turmoil is without precedent in the postwar period. With a significant risk of recession in the US, compounded by sharply rising inflation in many countries, fears are building that the global economy might be at some kind of tipping point… It is not impossible that the unwinding of the credit bubble could, after a temporary period of higher inflation, culminate in a deflation that might be hard to manage, all the more so given the high debt levels.”

    Ambrose Evans Pritchard has a nice summary here http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/30/ccbis130.xml

  10. fatbear commented on Jun 30

    Just fired up MS AutoUpdate for my Mac Office 2008 – 12.1.1 runs to 153MB – hopefully will fix your problem – if not, remind us out here and we’ll crowd-swarm it….

  11. Mind commented on Jun 30

    And the question is whether the big spike in commodities is a “bubble” or if it represents a secular change based on the fact that rapidly growing world demand is finally hitting up against the finitude of earthly resources. If the latter, then the old models of “inflation” will not cut it. Need to go to new thinking in earnest – can the collective psyche wake up to this? Can collective action create a reasoned framework for channeling economic evolution to a successful adaptation to this new reality?

  12. anon commented on Jun 30

    OT: $15 takeunder rumor on LEH making the rounds. Barry’s call looking good!

  13. ben commented on Jun 30

    what is the demographic of people they survey for these? Where do they live? What is the age range? Is it really representative of the country?

    I’m not aware of the process. I have never been surveyed.

  14. fatbear commented on Jun 30

    Update complete for MS Office 2008 Mac –

    Just set up a new chart, from a spreadsheet with dates in Col A and data in Col B – after selecting Cols for proper usage in chart, then went to Formatting Palette

    under Chart Options you will find Axes – there will be a few buttons there – the first two “Primary Vertical Axis” and “Primary Horizontal Axis”) should be selected – if not, select them – both axes showed up correctly

    I have not looked to see how to set this up as a Default, but I’m sure our friends at MS have made that easy to find….

  15. SteveW commented on Jun 30

    If a family has income after taxes and mortgage of $30K, a 3% difference in inflation amounts to $900 after a year. Given that household expenses are pretty lumpy ($900 is a car repair or a new TV) how can a family measure with any precision the “real” CPI?

    Further, people don’t buy a car, TV, refrigerator, water heater, etc. every year, so how closely are they really calculating the annual percent rise in those prices and adjusting for the proportion of their income? (ignoring the fact that most of those items are falling in price rather than rising).

    In the midst of those challenges, they are assaulted daily by news of gas and food price rises. And the things that have risen the most are the things they purchase weekly – the items that are stable or falling are purchased less frequently. This makes it way too easy to not see the forest for the trees.

    Against all this I don’t think consumer polls have a fighting chance against the economists.

  16. fatbear commented on Jun 30


    And just tried it on Phila Fed file – on Chart Formatting Pallette, go to Chart Data – select Edit – you’ll see that X axis is a named series, but that the named series (date or dates, don’t remember which) isn’t defined properly, which is why the lower left label reads as “date(s)” on the chart

    If you select Col A (the dates list) for the X Axis Label, the chart reads with dates in the label area – at my size (roughly 8″ wide) the dates series goes to every other year (1970, 1972, etc.)

    Hope this helps


  17. DL commented on Jun 30

    Over the next two years, Bernanke is going to have to create millions of new “inflation fighters”, i.e., unemployed workers.

  18. Rex commented on Jun 30

    Some of this is just getting silly. Who’s got a firmer grip on reality, someone who believes (based on years of study) that the BLS is basically right about consumer prices, or someone who uses the Goldman Sachs Commodity Index as a proxy for consumer inflation? I can’t remember the last time I bought a ton of copper.

    Fact is, commodity prices are a very small part of most consumer goods; wages are a much bigger factor, so are profits, marketing, packaging, etc. For instance, the recent doubling of corn prices has driven the price of the corn in a box of corn flakes from 5 cents to 10 cents.

    It is misleading to extrapolate increases in futures prices or producer prices to the prices consumers pay. In most cases, futures prices and producer prices are much more volatile than consumer prices are.

    The only real exception to this is energy It’s one of the few commodities consumers purchase in any volume.

    What’s driving consumers crazy isn’t the Goldman Sachs Commodity Index (which they don’t care one whit about), but their own paycheck, which isn’t going up as fast as prices are.

    The corn flakes might only cost 5 cents more, but their paycheck only went up 1 cent. That’s why we have horrendous consumer sentiment readings. And it’s also why the Fed isn’t worried so much about inflation: Inflation can’t really take off unless wages do. Without higher wages, consumers will just have to adjust to higher prices by buying less stuff, or less good stuff.

    We don’t have an inflation problem: We have a problem with falling standards of living, which I think is a much bigger deal.

  19. Marc commented on Jun 30

    It sounds like you’re saying the commodities are behaving normally and the economists are in denial. Perhaps its the commodities that are way out of whack and they shall be the next to revert to the mean.


  20. Melancholy Korean commented on Jun 30

    Yikes. That commodity chart is, like, the most frightening thing I’ve seen in a long time. I think the best trade might be to stay the hell away from that market, long or short.

    Irrational exuberance, oh, why oh why won’t you leave us alone?

  21. lark commented on Jun 30

    The Republicans decided to crush inflation by eliminating the wage part of the wage price spiral, by crushing the power of labor. That was back in the 1980’s, and it’s their most successful social policy. Now the mainstream hack economists profess to be shocked, shocked as to why productivity and wage increases are no longer coupled. They profess to be shocked, shocked as to the increasing debt burden and elimination of savings for American consumers.

    For heaven’s sake, get real, grow up, & take responsibility for what you chose to do. This economy didn’t emerge by accident. It was by design, and more specifically, by Republican design.

  22. HCF commented on Jun 30

    Unrelated to this post…

    Anyone know why it’s Amanda Drury hosting ‘Street Signs’ in the U.S. today? I did always love watching her on CNBC Asia. She seems so much more dignified and less of a cheerleader than the Erins and Marias of the world…

  23. Armen Kassabian commented on Jun 30

    Inflation is comprised of wage inflation, property increases, food, energy, medicine, and other components.

    Wages are the largest component and they have been stagnant for years.

    Property prices, both commercial and residential, are declining thereby removing a source of inflation (actually contributing to deflation)

    Food and energy prices as we know are increased at a great rate – but it is highly doubtful they will continue at this pace – a year from now, I doubt that oil would be at $290, etc..

    Medical inflation also showed the slowest rate of growth in years

    As a surgeon, I can tell you that I am getting paid less for each procedure, surgery, and visit compared to last year from all payers

    So overall inflation is still tame except in some very highly publicised areas.


    Armen Kassabian

  24. mhm commented on Jun 30

    Credit crisis? Not on my CC. I forgot to pay the last bill (~$100.00) and besides the late fee charge ($30.00; bastards) they increased the limit by $11,000.00 !! I’m amused and scared… what are they thinking? I should cash out and load on put options on them…

  25. E commented on Jun 30

    Armen Kassabian beat me to it. Barry, I love you man, but that is the most disengenious pairing of charts I’ve ever seen from you.

    If every single unit of currency on the entire planet was spent on absolutely nothing but commodities, then we’d have inflation to match the commodities prices. But commodities are only a small part of the universe of things that are exchanged for currency.

    Big ticket items are plunging in price right now. So are other assets. Bank lending is cratering. Money is disappearing. Inflation, by definition, is an increase in the money supply – do you see money being created right now?

    It’s about deflation, folks. Commodity prices are a head fake.

  26. D. commented on Jun 30


    It’s more than just your Corn Flakes. Go check your mayo… for the same price you now get 850g instead of 907g.

    Dow Chemicals JUST announced a huge price increase in plastics yet the price of oil has been climbing for a few years now.

    Just like most people out there you have trouble gauging the lag effect.

    The US has enjoyed 30 years of overvalued US dollar. The impact of the recent drop is just starting to hit.

  27. tomd commented on Jun 30

    A more helpful comparison chart would be one showing the growth of assets that pension funds, etc., have allocated to the
    “new asset class” of commodities since 2000.


  28. Jim Haygood commented on Jun 30

    “Commodities are only a small part of the universe of things that are exchanged for currency.” — E

    Gasoline, utilities and food for our family of three run about $1,500 a month, and are escalating in price. This is hardly negligible.

    But commodity prices also feed into the escalating cost of local government services. Checked your property tax bill lately?

    And, commodity prices feed into the cost of health care. A couple of hospitals in our area have tipped over into bankruptcy, as government and insurance reimbursements failed to compensate for their rising costs. The surviving hospitals, facing less competition, have raised their prices.

    Commodities most definitely feed into construction costs. That’s one reason the Port Authority of NY & NJ just threw out the budget and schedule for rebuilding the former World Trade Center site. Rising commodity prices made a joke of the original budgets.

    I’ll grant you, commodity prices are more volatile than the general rate of inflation. They overshoot on the downside (as in 1998 and 2001) and on the upside (as in 2008). But they do not lie as to direction. A SEVEN-YEAR-LONG PARABOLIC UPTREND, confirmed by double-digit inflation and food riots in the developing world, is not a minor matter. This is a 25-year flood, which could become a hundred-year flood if it gets any worse. Man the levees, citizens; inflation’s overrun its banks!

  29. Fredex commented on Jun 30

    If prices go up and wages don’t then the result is a reduced standard of living. I wouldn’t confuse that with controlling inflation.

  30. John commented on Jun 30

    Where do you get the idea the money supply is shrinking?

  31. Simon commented on Jun 30

    Goldilocks cooked the frog….slowly. Refer comments pop.vs.pros Part I.

  32. ben commented on Jun 30

    Maybe the answer to this question is as simple as the fact that people are waking up to the fact that it will be harder for them to live beyond their means moving forward and that fact upsets them.

    You can interpret data any way you want and I’d argue an economist is better at doing so than any joe blow off the street. Most people have absolutely no financial or economic sense so I don’t buy that people vs. the pro’s is even valid.

    Bottom line, the consumer is tapped out with no other places to go now since they didn’t save, the home equity is drying up, if not alredy gone, and credit is harder to come by and they are pissed and want someone to fix the problem they created. No accountability.

  33. E commented on Jun 30

    Jim Haygood and Simon,

    In the 40’s they used to say “there’s a war on”. In 2008 “there’s a credit crisis on”. It is destroying money.

    How much money is the commodities boom creating?

    Inflation is defined as the growth of the money supply – not the increase in prices. Prices are a rough measure of money supply change.

    Are wages rising? How about asset values? How’s housing doing?

    Looks like you guys and Barry are practicing a little “inflation ex-deflation” jiggering.

  34. Bruce commented on Jun 30

    No, inflation is defined as a general rise in the price of goods and services over time…..sorry. You are confusing the definition of inflation with one of the causes of inflation….

    Bruce in Tennessee

  35. cm commented on Jul 1

    Gary: “Perhaps if they swapped their six-figure (or even high 5-figure) salary with the typical American’s for a year,”

    If you add to that the various “creature comforts”, perks, and most notably the job description, many may not even last a few weeks.

    But OTOH there is a body of evidence that people will get used to almost anything, both on the upside and downside.

  36. DavidB commented on Jul 1

    Assuming those two charts are a relatively accurate measure of what they are looking at, I’d suggest that the commodity chart is indicative of a background squeeze taking place. I would guess that it is evidence that business margins, that were relatively healthy until now, have been squeezed by commodity prices. I would also guess that all that effort that businesses have made to offshore labor costs and bring their wage costs from dollars to pennies have now or are in the process of being eaten up by commodity prices.

    I think that these two factors are the reason there has not been great pressure on prices. Producers have been increasing their margins by stealth only to blow it out the commodity door in a mad auction. Now that commodities have held producers accountable for their practices this is starting to affect prices and going forward they will either have to change(because people can’t afford the price increases and therefore will stop buying marginal goods) or die. I assume many will die(ala GM) because most management don’t understand the concept of backwards…unless they are talking wages….and usually not their own

    I think we may now be in the era where true management is no longer made rich by stealth margin increases but by wise management of scarce resources

  37. Farmera1 commented on Jul 1

    In a word we are seeing the end results of GLOBALIZATION of the economy.

    Here is my idea. The FED says relative price
    differentials aren’t inflation. As long as there isn’t an excess of monetary stimulation commodities go crazy as they are as long as wages don’t take off then it maybe painful but it isn’t inflation. The FED also says/hopes eventually things will eventually come back down as people can afford less and less.

    This doesn’t account for globalization of the worlds economy. THe US is no longer the prime driver of the world’s economy so the FED can do nothing about commodity inflation.
    At this point the FED is just hoping commodities come back to earth in price.

    What this doesn’t address is peak oil, growing purchasing power of food in China, India, Middle East and the fact that wars CAUSE inflation (don’t believe me look at history when inflation tops out).

    The FED is helpless and the average US consumer is getting squeezed big time.

  38. Greg0658 commented on Jul 1

    Lark writes “Republicans decided to crush inflation by eliminating the wage part of the wage price spiral …”

    I think you have a book and/or a movie if you include a major section on grand plans leading up to Soviet General Secretary Mikhail Gorbachev to “tear down this wall” and how the Vietnam War brought the Chinese into this version of Capitalism.

  39. Josh commented on Jul 1

    There is no disconnect. A flat % inflation RATE leads to parabolic inflation. Simple.

  40. farmera1 commented on Jul 1

    This Just IN:
    This just in:
    Zimbabwe has exceeded analysts expections by keeping inflation at 550,000%. It is also reported that the majority of citizens can now eat one meal a day, shattering previous projections of one mean every-other-day…

    …the good news just keeps on coming…

    But according to the FED wages haven’t gone up in ZIM; ergo no inflation. Amazing how you can fix problems with a little word smithing/spinning/closing your eyes/etc. There are so many ways.

    I copied this idea from someone somewhere at some time. But I don’t remember who/where/when. But I thought it was funny and pretty much reflects the FEDs, what me worry attitude.

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