Inflation At 17-Year High

Wow! Big pop in inflation last month: July
CPI rose 0.8% headline, 2X consensus expectations
as  food, energy, airline fares and — of all things, clothing apparel — rose in price. 

The meaningless core rate rose 0.3%, 0.1% more than expected.
Year over year price increases are 5.6% — the biggest monthly gain since gains January 1991. Risers include 1.2% gain in apparel (14,4% annual!), 0.4% gain in recreation, 1.2% gain in tobacco and a 1.3% gain in airline fares.

Energy prices rose sharply in July, tagging on another 4%; gasoline gained 4.1%, while natural gas surged 7.4%. Food prices saw a 0.9% rise, and "food at home"increased 1.2%.

Apparel
has been one of those few sectors that have seen downward pricing
pressure over the past few years, so this is somewhat surprising —
and perhaps aberrational. Services inflation (ex
energy) rose 0.3%.
Annualize the 0.8% monthly gain and its 9.6% (this is not accurate due to significant seasonal variations in July)

New car prices increased 0.2%? How did THAT happen?

The headline number should recede in coming months due to the
decline in oil and commodity prices, we still have a up big year over year gain across the board.
The WSJ noted that the "surprising rise in core inflation that excludes food and energy last month will keep officials on edge about the possibility that food and energy prices will become more firmly entrenched in the economy."

In normal economic cycles, recessions typically bring about a deflationary environment. One would expect to see significant demand destruction as the economic contraction continued, impacting prices negatively and moderating inflation. While that demand destruction appears to have occurred in Crude Oil and a few other commodities, it has yet to happen across other goods and services.

There remains the outside possibility that this will be an inflationary recession — let’s hope otherwise.

July_cpi_yoy

Cpijuly_4_mos

Charts via Jake at Econompic

>



Sources:
Consumer Price Index Summary
CONSUMER PRICE INDEX:  JULY 2008
http://www.bls.gov/cpi/
http://www.bls.gov/news.release/cpi.nr0.htm

U.S. Inflation Hits 17-Year High As Increases Move Beyond Food, Oil
BRIAN BLACKSTONE
August 14, 2008 9:55 a.m.
http://online.wsj.com/article/SB121871617494640459.html

U.S. Consumer Prices Rose More Than Forecast in July
Shobhana Chandra
Bloomberg, Aug. 14  2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aL2cNvLZtzMg&

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What's been said:

Discussions found on the web:
  1. Eric commented on Aug 14

    BR, do you really hope otherwise? At the risk of triggering indignation, it’s pretty clear that the MAJORITY of people who populate this blog would absolutely LOVE a steady stream of stagflationary developments that send the markets much lower. I mean, c’mon, this blog has a lot of gold, canned preserves and ammo storing types of people on it. And that’s fine. But it’s hard to believe someone who is positioned bearishly is not hoping for bearish news.

  2. Vermont Trader commented on Aug 14

    Even with energy much lower than the current spot price it will take years for the inflation to work through the system.

    I was just looking though a list of the Year to date returns of all the markets in the world.

    The top 3 are…

    Kuwait +16.4%
    Caracas +3.1%
    Russell 2000 -0.9%

    We hit flat for the year at IWM 75.90.

    Too many shorts?

  3. manhattanguy commented on Aug 14

    It’s 1980s all over again. I see that Central banks around the world are raising interest rates to fight inflation except of course our own central bank. Stagflation is unavoidable. I think Fed will be forced to raise rates at a faster rate (over 10%?) by 2009 year end.

  4. Mr. Obvious commented on Aug 14

    Too bad we can’t eat computers (although it is a shame that they have become so cheap that it is cheaper to buy a new one than to hire someone to clean all the malware off my home PC….)

  5. Steve Barry commented on Aug 14

    This will be a deflationary debt crash. It is just getting started. Pull up a chair. The rise in prices is some other phenomenon. We’ll know what it was in hindsight…massive printing of money? commodity hoarding by China? It can’t last much longer.

  6. MarkTX commented on Aug 14

    Looks like the FED is getting what they want,
    (and it has to be a modern miracle right?)

    Higher inflation(5.6%) and lower yields (TNX-3.9% – FVX-3.2%) with yields going lower after the report that inflation hits a 17 yr. high…

    Inflation hawks, my a$$

    There is a free lunch (for some)

    Maybe Greenspan can call a bottom and/or top on inflation???

  7. Peter commented on Aug 14

    OT. Rumour to be spread via blogs. There is a run on the bank at Downey Financial Corps.
    cc Sheila Bair

  8. constantnormal commented on Aug 14

    OK, so which is it, inflation or deflation? I don’t see how we can have both at the same time (maybe we’re going to slam back and forth between them until our brains explode).

    The collapse of the debt infrastructure sure LOOKs like deflation, but the soaring rate of inflation says otherwise.

    Which is it? Are we still in Kansas, Dorothy?

  9. leftback commented on Aug 14

    Eric, I have relatively few canned preserves and a little gold, but I promise you that the FED likes these inflationary numbers more than I do. It’s deflation that will really feed the Bears….

    The inflation is almost all in the rear view mirror. These numbers will start to subside now that the oil spike is behind us.

    Steve Barry is right – this is deflation on a large scale – and it is now right in front of us and the reason most people cannot see it is because they have never lived through it. So many people are blinded by the world in their faces they cannot see forward.

    Just ask the Japanese about 50% haircuts in RE and 80% drop in the Nikkei. Compare current JGB yields with Treasuries and you can see where we are going to go. As Mish points out: “what can’t happen, is about to happen..”

    Do you really think we are all smarter than the Japanese and the FED is smarter than the JGB? Bernanke is out in a rowing boat trying to fix the levees with chewing gum and the hurricane is about to bear down again…..

  10. rww commented on Aug 14

    There are too many houses, stores, offices, cars,clothes,electronics, etc. Too much of everything except jobs, wage increases and, consequently, demand. With the jobs picture deteriorating here and recession spreading around the globe, it can only get worse.

  11. MarkTX commented on Aug 14

    OK, so which is it, inflation or deflation?

    Are we still in Kansas, Dorothy?

    Posted by: constantnormal | Aug 14, 2008 11:59:06 AM

    Actually we are on “Animal Farm”.

    “Somehow it seemed as though the farm had grown richer without making the animals themselves any richer— except, of course, for the pigs and the dogs.”

  12. Jim D commented on Aug 14

    Apparel prices rising aren’t too shocking – almost all apparel has been imported for years now, and the dollar was tanking during that period.

    Also, cotton prices spiked some time ago – it just takes a while to work through the system. (Cotton prices are back down now, of course.)

    And lastly, how many apparel plants are near Beijing? I don’t know, but don’t forget that most of the plants near Beijing have been shuttered for quite a while now, so we can actually *see* the athletes compete. What would tend to have a deflationary effect on raw matierials, and an inflationary effect on finished goods – and much of our apparel comes from China.

  13. jodie commented on Aug 14

    Of course, this myth that Japan has suffered this past generation is pure bunk. The Japanese have and continue to enjoy one of the highest standards of living in the world. I would love for the US to experience what Japan went through in the next decade.

  14. Jim D commented on Aug 14

    “Of course, this myth that Japan has suffered this past generation is pure bunk. ”

    Every single person who bought Tokyo real estate during the bubble is still underwater, 20 years later. Bunk?

    “I would love for the US to experience what Japan went through in the next decade.”

    Be careful what you wish for.

  15. jodie commented on Aug 14

    So real estate in Boston, NY and San Francisco might become more affordable for people who want to live there. Oh my what a travesty.

  16. Steve Barry commented on Aug 14

    Asset prices have been pumped up by DEBT. The first equation you learn in accounting is ASSETS = DEBT + OWNER’S EQUITY. Once equity gets wiped out and the debt crashes, what happens to asset price? Home prices that are underwater all all debt and the debt is crashing. Someone may come along and pay something for the asset, but then someone eats the bad debt.

  17. leftback commented on Aug 14

    jodie –

    “Of course, this myth that Japan has suffered this past generation is pure bunk”

    exactly, that’s my point. The Japanese decided to allow investors in over-inflated asset classes to bear the brunt of the long recession, rather than to punish the populace by printing money and causing runaway inflation.

    Japan had net savings and the US has enormous public and private debt. We can look at Japan as a best-case scenario – given US government debt it is unlikely that yields can stay as low as in Japan.

    Although Treasuries will go much lower, spreads are going to go through the roof for all kinds of corporate, municipal and personal debt. Keep an eye on LIBOR. The credit markets have some very unpleasant surprises in store for equity investors.

  18. Steve Barry commented on Aug 14

    Where the dollar is now, will kill 4Q growth for multi-national tech companies. Last year 4Q got a 5-10% boost y/y…this year may even get a hit. And tech companies with ltttle commodity input costs (GOOG, MSFT, etc) will not benefit from lower COG.

  19. jodie commented on Aug 14

    “The Japanese decided to allow investors in over-inflated asset classes to bear the brunt of the long recession, rather than to punish the populace by printing money and causing runaway inflation.”

    Well said!

  20. batmando commented on Aug 14

    as constantnormal sez:
    “OK, so which is it, inflation or deflation?”
    and until such time that becomes clear(er), how does one position one’s assets.
    Sitting on cash can try one’s patience, n’est-ce pas?

  21. Willard Sing commented on Aug 14

    With inflation so obvious and prevalent, does anyone have an opinion regarding why the precious metals aren’t shooting through the roof? Is there any credence to the gold manipulation theory?

  22. Steve Barry commented on Aug 14

    W Sing:

    Another question…gold went from 350 to almost 1000…Newmont Mining, the largest gold miner, trades below where it was in 1996. Some of the smaller miners did well…but WTF is up with this? Turned me off to gold.

  23. Sinomania! commented on Aug 14

    The surge in apparel is related to China not because textile plants are closed for the Olympics but because of US quotas – prices have surged in the categories where quotas have been met and imports from China have declined this year BUT the safeguards on 34 major categories of imported textiles from China will end on December 31. This is a part of the USA-China trade deal passed under Clinton and will have a major impact on imports of textiles starting next year unless Congress is pressured to do something to thwart the trade.

  24. David commented on Aug 14

    Oh my, a Mish fellow traveler.

    Inflation is deflation, black is white, and have you ever noticed that a deflationist like Mish calls for buying gold?? If you believe in deflation, you should be in cash.

    Anyway, companies have been squeezed on the way up with their inputs, naturally, they raised prices quickly. As the y-y comps ease up on input price increases, they’ll slowly ease up also on the consumer prices, but INflation (not DEflation) will be with us longer than people think; longer than is typical for recent recessions.

    Again, this decade is a rhyme of the ’70’s.

  25. leftback commented on Aug 14

    “So real estate in Boston, NY and San Francisco might become more affordable for people who want to live there. Oh my what a travesty.”

    Exactly. This is my perfect outcome – when useful members of society like teachers, greengrocers, software engineers, scientists, inventors, police and firemen are able to buy homes in the communities in which they work. Of course this might leave a few realtors, bankers and other financial parasites out in the cold…..

    Socialism, in a way – or at least a more fair society – but achieved by allowing efficient markets to function without interference from the banking class and others who claim to create wealth but in fact produce nothing.

  26. MarkTX commented on Aug 14

    Inflation in the Texas state lottery or sign of the times?

    http://tinyurl.com/5k42my

    I thought it unusual that there would be so many $5 then $10 dollar scratch-off lottery tickets, but then $20, and now $50 tickets are available.

    Think about it, $50 for ONE scratch-off lottery ticket, that is insane!

  27. BrianTX@SD commented on Aug 14

    Steve Barry has nailed it.

    Oil led the CPI up, and it will lead it down. Worrying about inflation at its all time highs right after oil peaks, is kind of anticlimatic, don’t you think?

    I find it funny that the market is rallying on a big sigh of relief that the inflation monster has been slayed. Little do they suspect that a much bigger and hungrier deflation monster killed and ate it.

    Hold on, deflation is here. Any bets on how long it will take people to finally figure it out on CNBC?

  28. Francois commented on Aug 14

    “Actually we are on “Animal Farm”.

    “Somehow it seemed as though the farm had grown richer without making the animals themselves any richer— except, of course, for the pigs and the dogs.”

    And let’s remember that, albeit all pigs are equal, some pigs are more equal than others.

  29. Shane commented on Aug 14

    The biggest problem is that everyone looks at this as black or white, inflation vs. deflation, printing vs. credit, depression 1930s style vs. 1970s. Everyone wants to see a linear, logical progression, unfortunately there are sooooo many moving parts that it is darn near impossible to say it is black or white.

    One must remember, all general prices are determined by 4 major factors, supply/demand of goods, and supply/demand of money and credit. It is entirely conceivable to have an inflationary depression. Let’s look at the general known issues.

    Credit is collapsing, IMO this isn’t nearly as deflationary as some make it out to be, it is disinflationary absolutely. The only way that a credit collapse can be deflationary is when banks collapse and the funds are not FDIC or government insured. All money (even credit) except for cash kept on hand is going to be in bank accounts or an institution of some kind. As long as those institutions are propped up by the gov. then the collapse will be disinflationary, meaning they want want to lend out money, but money hasn’t been destroyed. All the money lent out by the banks during the housing boom still exists! . . . unless it wasn’t kept in FDIC insured accounts of banks that fail.
    So even though the housing market is collapsing that money has to find a home.

    So the Fed is and will continue to monetize the debt. On top of that the TMZ, M’, etc is still actually growing . . . it is slower than the past couple of years, but it is not negative!

    We know that demand for goods is dropping, but at the same time (especially for autos), the supply is also dropping. Supply is much more flexible today anyways with the JIT mentality.

    In addition, when the gov. expands the money supply, the 1st users of the money benefit the most (i.e. before the market has had time to adjust), they can therefor put that NEW money into any market BEFORE prices have adjusted to the new influx of money. This leads to the fact the inflation is completely non-uniform. We’ve been undergoing a tremendous amount of inflation since 2001, but since it’s non-uniform it 1st manifested itself in housing (which was undergoing a natural boom) . . . inflation distorted the market and now it is correcting. The gov. wants to reinflate the housing market, but any attempts to do so will be futile. Any NEW money created will NOT replace any old money destroyed (i.e. go to the same location). The NEW money will go to the “hot” sector.

    It is entirely conceivable that we will have price depreciation in the housing market for a long time and price appreciation in commodities for a long time.

    Once you understand that inflation is an increase in the money supply not an increase in prices then things start making sense.

    I have read a couple of articles that make the point that technically Japan did not undergo much monetary deflation, their money supply was still growing through much of the 90s.

    The reasons why we did have deflation in the 30s is b/c we were tied to gold . . . as soon as FDR devalued gold in 1933 we had ~5% inflation that year.

    This is why it is pointless for the Fed to try and manage the economy . . . too many variables with too many different outcomes that are extremely hard to measure.

  30. AJ commented on Aug 14

    Whether we get deflation or stagflation is moot for investors as in both environments pricing power in real terms will be woefully inadequate for most companies. My bet for consumer goods is inflationary as most of these are priced in a global environment and that one is inflationary. Also sticky prices will prevent that the temporary downturn in commodities will show up in the consumer goods.

  31. Steve Barry commented on Aug 14

    All the money lent out by the banks during the housing boom still exists! . . . unless it wasn’t kept in FDIC insured accounts of banks that fail.

    I don’t agree. They didn’t lend anything of value that we can call money. A sub-prime lender comes in with no job…the bank creates capital by levering up 30 to 1, the house gets a bloated appraisal and the bank extends credit for 100% LTV. Where is there any asset that won’t deflate? Every single component is taking a hit…bank is deleveraging, the borrower’s ability to pay never existed and the home price was a bubble. Whoever is left holding the bagmortgage or parts of it will take a haircut. The only thing that prevents total carnage so far is we can’t figure out the final bagholders yet.

  32. Jodie commented on Aug 14

    “I don’t agree. They didn’t lend anything of value that we can call money.”

    I don’t understand what this means. Money is fungible. There is no good dollars vs bad dollars. The guy who sold the asset has money just as good as any the FED could monetize.

  33. Blackhalo commented on Aug 14

    “OK, so which is it, inflation or deflation?”

    Both, inflation for commodity based products and deflation for real estate.

  34. Shane commented on Aug 14

    Steve,
    You’ve got to look at the entire picture.
    Person A (be it an actual homeowner selling is house, or homebuilding, or spec, or bank) puts a house on the market for 400k. Say it costs them (either in their mortgage or actual building costs) 200k. Person B (again, some organization, individual or whatever) takes out a loan from the bank for 400k and then pays person A. Now say person B defaults on the loan. The extra 200k that the bank created (the original 400k selling price – 200k in actual costs) is still in the system, it didn’t disappear. The banks ability to lend out more money has, but unless the extra 200k was put into an account that is either non-FDIC insured or is not bailed-out money has not been destroyed. If there are no bailouts then money is destroyed (I would argue this is what needs to happen).

  35. pft commented on Aug 15

    Now, if someone can explain how the Fed making it more expensive for their banks to borrow money can solve inflation which is entirely driven by oil prices and cartel pricing practices in other commodities and services, I am all ears

    Funny how the dollar rallies on all the good news.

    Trade Balance decline- nope
    Economic activity picking up-nope
    Inflation contained-nope
    Fiscal discipline – nope
    Interest rates on loans to those who can afford them declining-nope
    Banking crisis resolved – nope
    Fed Interest rate increases to match other FCB’s-nope

  36. John Williams commented on Aug 15

    John Williams: Adjusted to pre-Clinton (1990) methodology, annual CPI growth rose to roughly 8.6% in July from 8.3% in June, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, rose to a 28-year high of roughly 13.4% in July, up from 12.6% in June…

    Real July Retail Sales declined 0.9% m/m and are down 2.47% y/y.

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