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On those Inflation Numbers
Inflation is a thorny topic for those who try to write about it.
Everyone has a different gripe, and they are all right. The numbers
bandied around from CPI to Core and non-core and whether crazy things
like hedontics (that IPad thing) should be even considered in the
equation make mush of any discussion. No one really trusts the numbers.
Not even Fed officials. (TV anchors do, however)
The next issue is that everyone lies about the numbers. From Bernanke
to, well, me. The numbers are easily skewed to make whatever case you
want.
I can’t help that the measuring sticks that we use are flawed. To my
knowledge there is no better set of numbers to use. So I will use COLA
as a benchmark to make a few points. A look at America’s long-term track
record on inflation:
The most notable part of this graph is the tremendous blowup that we had
with inflation in 2008-2009. We raced higher, then it collapsed. A
closer look at monthly changes in COLA since 2007.
Some observations about this very unusual period in history.
-From July of 2008 through February 2011 inflation rose by just ½ of one
percent (about ¼% per annum). If you want QE to go on for another few
years you will point to this as the evidence that inflation is
“worrisomely” low. This is what Bernanke is looking at. There is no
inflation at all over this time period.
-I’m not sure of the economic relevance, but I do think it is worth
noting that as of February 2011 inflation has fully recovered from the
08-09 recession. We will be making new all time highs for the next six
months at least.
-The peak to trough drop in inflation came from July to December of
2008. What we call inflation fell by a real 5% (11% annual). You wonder
why guys like Bernanke and Paulson were freaking out? This is the number
that scared them the most. In the fourth quarter of 2008 inflation fell
at an annual rate of 19%. That’s pant-shitting time. This is the panic that brought us TARP and QE and all that other stuff they did back then.
-From the trough the COLA measure of inflation has risen from 204.8 to
217.4 today. Over this 26 month period we have seen a real rise of 5.8%.
(2.3% annual). This number is quite a bit hotter than Bernanke’s test
for inflation of, “a little under 2% per annum”.
-In the past nine months CPI-W has risen by an annual 2.2%.
-In the past six months CPI-W has risen by an annual 2.9%.
In the past two months the CPI-W has risen by an annual 5.1%
It is these last three data points that has put inflation back on the
front page. Not only are we experiencing measurable inflation on a daily
basis, we are also seeing the change in pricing accelerate on a very
rapid basis.
-A point not from the chart. The CPI-W will make significant gains for
April, May and June. That inflation is now baked in the cake. Bernanke knows this quite well.
This chart shows historical annual COLA increases. This data smoothes out all of those monthly gyrations.
There are only two years where this measure of inflation exceeds 5%. We
know what happened in 2008; that was ugly. In 1991 we had a mild
recession (7.8% unemployment, peak to trough GDP –1.4%, duration 9
months). This recession was brought on by a blowup in the oil market. We
were headed off to Gulf War #1.
In 2001 we had another mild recession (8 months). That one was caused by
the Dot.com blow out. CPI-W was on the high side at 3.5% that year. But
the stock market was racing at 20% per annum. Easy money caused that
speculative boom. Everyone paid a price.
A synopsis:
After a tremendous hiccup inflation is today at an all time high. CPI-W
has grown rapidly over the past half year. It is growing very rapidly
(dangerously?) so far in 2011. It is near certain that the rate of
inflation over the next few months will be significantly above trend.
Historically, periods of rapid (5+%) inflation are met with periods of
recession. The related conditions that bring economic crisis are
excessive monetary policy, war and or an energy shock.
All four of these conditions are met today. In other words, we are
asking for trouble. How Mr. Bernanke can avoid seeing how all these
stars are lining up is a mystery to me.
Note:
My oil contract ran out. I got a 1,000 gallons spot delivery at
$4.40/gal. The spot price a year ago? $3.17. That comes to a tidy 36%
increase. In that corner of my expenses I’m experiencing hyperinflation.
Bernanke can exclude food and energy from his calculations at his and
our collective peril.
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I'd rather have 3 American Silver Eagles....
+ $122.00
INflation, inshmation.
What REALLY means something, far more than words that have been put through a spinning machine is simply: COST OF LIVING.
If the cost of living is rising, and it has been since the dollar has been devalued over time to the point that it is COSTING more of them to live, it matters not whether you include labor.
The TRUTH is: EVERYTHING on earth is LABOR. The integrated circuit you buy from American Semiconductor, Inc. to make your Dell MoBo? You may treat it as raw material cost on your income statement but in fact it's REAL place belongs under, "Cost of Labor". The circuit itself is a composite of many kinds of labor. The labor to extract the silica from the mine. And the machinery that extracts it? That too is ALL labor. Because you need humans and robots (more labor to make the robots) to operate the machinery to extract the silica.
Everything on earth's true category is LABOR.
It may be convenient to label the individual components as material costs, overhead (labor) rent (labor of those who built the factory) but they are in fact ALL labor.
So. Labor is already included in the so-called "inflation" rate and the reason why our Cost of Living has been rising every minute of every day since time began.
serious question .....what is the reason that gas and food are not included in inflation numbers.....i cant think of 2 others items rising prices,that hurt the taxpayers more on a day to day basis
Given the desperate measures of our sociopathic ruling elite to dissemble, lie, and manipulate every financial and monetary metric in order to confuse and bamboozle the public into thinking that they have our economy and monetary system perfectly under control, when in fact both are dying, I think you just answered your own question.
When I go out of town, I tell the lovely, leggy lady wherever I see her that I build condominiums for a living. High end stuff that commands big money in exotic locales all over the world.
Enough of them buy it to make my trips very very fruitful.
Who's fault is it that they believe me? Mine or hers?
In this world, lying to strangers is practically coin of the realm. Politicians have known this since the first caveman discovered the gift of speech from some meaningless grunts. Businessmen and wimmin, lovers, priests, popes, POTUSes, and every human bean on earth has been telling lies to others and mostly to themselves since their ass was smacked at birth.
Lying is grease. It oils the machinery for the eventuation of maximizing self-interests.
If you choose to believe that you can buy a house three times what you can afford, with no money down, and that there will be no consequences to you or anyone else, then you have succumbed to the power of the lie. Woe be to you.
You answered your own question.
Like your analysis but please use the terms more correctly, "...After a tremendous hiccup inflation is today at an all time high...." inflation is not at an all time high. The CPI is at an all time high. You know the difference, I know the difference but others may not and be mislead.
Other than that, very good as always. I don't always agree with you but your analysis is always good and thought provoking.
Inflation has to be separated from currency devaluation. In the 60's, 70's, and 80's the modest inflation experienced by the U.S. was not related to dramatic swings in the dollar's value against other hard currencies. The inflation we are seeing today is simply a rebalancing of hard assets and commodities against a deliberate effort by Zimbabwe Ben to cheapen the value of the dollar so that the nation's creditors can be cheated by repayment in less valuable currency. That's not traditional inflation. It's simply a reflection of the fact that the dollar is worth less.
Politicians and Economists love their statistical manipulations. The distinctions between Inflation and Currency Devaluation go long way towards explaining why TPTB have a fetish for physical wealth (beit PM, real estate, or whathaveyou). I came across this nugget while trying to find the acerage for Mount Vernon (6500 acres).
http://en.wikipedia.org/wiki/George_Washington
Historians estimate his estate was worth about $1 million in 1799 dollars, equivalent to about $18 million in 2009 purchasing power. Source: Robert F. Dalzell Jr. and Lee Baldwin Dalzell, George Washington's Mount Vernon (2000) p. 219; Purchasing power was calculated at Lawrence H. Officer and Samuel H. Williamson, "Purchasing Power of Money in the United States from 1774 to 2009," MeasuringWorth, 2010
So:
6500 acres of prime urban and suburban real estate just outside of Washington, DC, in one of the wealthiest counties in the US.
$1 million in 1799 dollars $153/acre
$18 million in 2009 dollars $2769/acre
I know the US real estate market is hurting, but try finding land in Fairfax County for $2769/acre
Money and Wealth are measured very differently, especially over time.
I lived in Alexandria, VA until 2007. I don't know of any place near Mt Verson that you could buy 1 ac for $3,000 never mind a large undeveloped property with river frontage. They should ask a realtor for current valuation - probably between 100K to $250K per ac
Indians, thank you.
Are you deliberately trying to confuse things?
As Marc Faber just summarized nicely in his yesterday interview: "Money is a medium of exchange, a unit of accounting, and a store of value."
These are short, medium, and long term tasks. Who gets shafted first if inflation rises?
But I can assure you inflation impacts all three of them. A wholly different question is if at least workers get compensated in rising wages - that was clearly different in the sixties compared to today.
And it seems other countries already know about that "inflation for creditor cheating" trick. Maybe you have heard about the dollar peg.
P.S. Nice rack
"It's simply a reflection of the fact that the dollar is worth less."
You can't blame increased inflation solely on the decreased value of the dollar, there is more to it than that. The % increase in commodities is much higher than the % decrease in the dollar. Inflation is mostly happening because of a combination of excess liquidity (QE), ZIRP, and lack of bank lending. The excess liquidity has no where to go except into speculative asset bubbles, which artificially creates higher stock and commodities prices, which causes inflation. If you take away the monopoly money and speculation, there is not enough real demand in the economy to justify these high prices. The dollar is being devalued, but is not enough in and of itself to cause high inflation.
Exactly right. The question is how long that can last.
Th french have an official CPI that does NOT include...Oil/energy price affected goods, imported food items...sooooooo...they are on the same page!
The world learned so well from Canada during the early 90's. Fucking Brian Mulroney. May the man rot and his children die of AIDS.
40% OF US CORE INFLATION IS RENT EQUIVALENT..SO AS HOME PRICES DECLINES, INFLATION DECLINES.
@Tempo
It is completely market dependant, and it's tied to JOBS not home prices. In my market we have a below national average unemployment rate and a semi-soft real estate market. However our rental occupancy rates are >90% because people have jobs (just not enough credit to buy a house). This translates to strong rental prices and a likely trend up. It's very likely I will raise rents some on all of my rent houses when the leases come due.
Your comment would be true in places like Detroit where there are no jobs and people are leaving.. Not so much in Texas.
Silver, Gold, and Real Estate.. Eff the stock market.
Keep in mind that today's sharp consumer price inflation is a product of the Fed's response in 2008-2009. Steve Saville demonstrated that the lag between Fed credit expansion ("accomodative policy") and subsequent CPI inflation is 18 to 24 months, sometimes more.
So we haven't even begun to feel the inflationary effects of QE2--it's still underway.
By the end of 2012, the wailing and gnashing of teeth will be deafening. Obama will not be re-elected, unless the Repub ticket is Charlie Sheen/Lindsay Lohan. Maybe not even then.