Best of the Week
Most Popular
1.SNP Offers Labour Deadly Death Embrace Alliance, Holding England to Ransom, Destroy UK From Within - Nadeem_Walayat
2.Gold And Silver – Most Widely Used Currency In Western World? Stupidity - Michael_Noonan
3.Election Forecast 2015 - Coalition Economic Recovery vs Labour Collapse - Nadeem_Walayat
4.Election Forecast 2015 - Debates Boost Labour Into Opinion Polls Seats Lead - Nadeem_Walayat
5.Why are Interest Rates So Low? Ben Bernanke, Confused as Ever, Starts His Own Blog to Prove It - Mike_Shedlock
6.Leaders Debate Election 2015 - Natalie Bennett Green Party Convincing Anti-Austerity More Debt Argument - Nadeem_Walayat
7.Labour Economic Collapse vs Coalition Recovery - UK Election Forecast 2015 - Video - Nadeem_Walayat
8.China’s Stock Market Mania; How High can Red-chips Fly? - Gary_Dorsch
9.Gold and Misery, Strange Bedfellows - 31st Mar 15 - Dan_Norcini
10.Ed Miliband Debate Election 2015 Analysis - Labour Spending, Debt and Economic Collapse - Nadeem_Walayat
Last 5 days
SNP Publish England's Suicide Note as Pollsters Still Forecast Labour-SNP Election Disaster - 21st Apr 15
Characteristics of Extremely Over-Indebted Economies - 21st Apr 15
Trader Education Week -- a Free Event to Help You Learn to Spot Trading Opportunities - 21st Apr 15
Gold & Silver Alert: Silver Stocks’ Signal - 20th Apr 15
Now is the Time to Buy Resource Stocks, Especially Gold Equities - 20th Apr 15
DJ Transportation & Utility Averages Suggest Stocks Bull Market Is Over - 20th Apr 15
Crude Oil Price Bull Market Hope - 20th Apr 15
Stock Market Bears Get Slaughtered Despite Greece Counting Down to Grexit Financial Armageddon - 20th Apr 15
The Rise of the Paper Machines - 20th Apr 15
Gold and Silver Inflection Point - 20th Apr 15
SP500: A Butcher's Stock Market (Chop Chop Chop) - 20th Apr 15
Are Stock Market Bears Slowly Gaining Control? - 20th Apr 15
Sugar Commodity Price Bear Rally - 19th Apr 15
Avoid the Spread of the Stock Market "China Syndrome" - 19th Apr 15
Stock Market Going Nowhere Fast - 19th Apr 15
An Easy Way to Profit From the Two Biggest Trends in the Stock Market - 19th Apr 15
No Scripture Is Divine, Authentic and Beyond the Creation of the Human Brain - 19th Apr 15
Inflation, Central Banks, and Business Cycles - 18th Apr 15
Stock Market Correction May be Nearing End - 18th Apr 15
UK Housing Crisis, Immigration, Population Growth, Election Forecast 2015 - Video - 18th Apr 15
Q1 Corporate Earnings Risky for Stocks - 17th Apr 15
US Stock Market Getting Scarier by the Day - 17th Apr 15
Stock Market Watershed Day - 17th Apr 15
Gold Price Has “Hallmarks Of Market That Is Bottoming” - 17th Apr 15
Chinese Stock Market - Men Go Mad in Herds - 17th Apr 15
Two Stocks Offering Investors High Yields and Profits - 17th Apr 15
Gold Price Has “Hallmarks Of Market That Is Bottoming” - 17th Apr 15
Chinese Stock Market - Men Go Mad in Herds - 17th Apr 15
Two Stocks Offering Investors High Yields and Profits - 17th Apr 15
King Dollar Hurting Stock Market Corporate Earnings! - 17th Apr 15
Production Declines Hide Bigger Crude Oil Storage Issues - 17th Apr 15
Top Three Takeaways From Today’s OPEC Crude Oil Report… and How You Can Profit - 17th Apr 15
How to Profit from Australia's Healthiest Biotech Stocks - 17th Apr 15
What Is Really Driving Gold Price? - 17th Apr 15
Will Ever More Boomers Selling Retirement Assets Change Investment Prices For Decades? - 16th Apr 15
Won't Be Contagion with 'Grexit' Greece Euro-zone Exit - 16th Apr 15
Sharp Decline in USD/CAD and Its Consequences - 16th Apr 15
Blackstone is like Apple, Google, Hermes, Boeing - 16th Apr 15
The Most Dangerous Financial Headline I've Seen Since the 2008 Crisis - 16th Apr 15
Is Legal Tax Avoidance Extinct in the UK? - 16th Apr 15
Why Russia Will Send More Troops to Central Asia - 16th Apr 15
More Thoughts on the Current Crude Oil Market - 16th Apr 15
U.S. Treasury Secretary Warns Greek Exit Will Cause Enormous Disruption and Hardship - 16th Apr 15
The Hottest New Place to Find Stock Dividend Income in Q2/2015 - 15th Apr 15
How to Escape the Pensions Squeeze - 15th Apr 15
Water Crisis Game Changing Water Revolution - 15th Apr 15
The Drying of California - Corporate Farms Control of Water - 15th Apr 15
OPEC Going Broke, Dumping U.S. Dollars. Is That Good Or Bad? - 15th Apr 15
OPEC Just Confirmed It’s Losing the Oil War - 15th Apr 15
Four Uranium Companies Poised to Profit from the Growth of Nuclear Power - 15th Apr 15
Stock Investing Tread Softly… and Carry a Big Risk-Management Calculator - 15th Apr 15
Crude Oil Price Technical Outlook - 15th Apr 15
Important Bitcoin Price Action - 15th Apr 15
UK House Prices, Immigration, Population Growth and Election Forecast 2015 - 15th Apr 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Historic Bubble

U.S. Economy Inflation R.I.P. Deflation

Economics / Inflation Jul 17, 2011 - 06:30 AM GMT

By: EconMatters

Economics

Best Financial Markets Analysis ArticleDespite a big 4.4% drop off from energy prices in June following a 1.0% fall in May, the latest BLS data showed that the Consumer Price Index (CPI) for June was still up 3.6% year-over-year.

The core CPI (less food and energy), an inflation gauge watched closely by the Federal Reserve, also increased 1.6% year-over-year, and has been steadily rising and most of the increase has come within the past six months. (See Charts Below)


What's more telling is that the CPI numbers would have been a lot more intense without the 4.4% drop in energy. Notably also, the core CPI is closing in on Fed's long-run overall core inflation target of 1.7% to 2%. Beneath the main number, the CPI for food was up 3.7%, and the index for food at home has jumped 4.7% over the last 12 months, with all the major groups increasing 3.2% or more, while the energy index spiked 20.1%.

Inflationary pressure is also building up in Producer Price Index (PPI). Compared to a year earlier, producer prices were up 7.0% while the core rose 2.4%, the largest increase since July 2009 (See Chart Below). This is after taking into account that gasoline prices slumped 4.7%, while residential electric power costs declined a record 2%.

There is typically a time lag before the cost increases could work through the supply chain from producers to consumers, depending on the type of goods. By looking at the two charts comparing CPI and PPI on all items and core (excluding the more volatile food and energy), one thing worth noting is that in the past twenty years, based a 12-month percentage change, CPI (all items, as well as core) historically had outpaced PPI until around 2003-2005 time frame.

However, since 2008, the more definitive trend has been that producer prices running much higher than consumer prices, yet we haven't really seen a corresponding CPI jump yet in the past two years. In fact, the subdued consumer inflation prompted a wide-spread deflation scare even among the Federal Reserve members and was cited as one of the supporting factors for QE2.

But theoretically, the two indexes should connect where rising prices at the producer level will eventually be passed through to consumers or producers’ profits would suffer with rising input costs.

In an interview with The Atlantic, Barry Bosworth at Brookings Institution noted CPI and PPI baskets have different weights on different items in the index. Services have a heavier weight in CPI than in PPI, thus price changes in goods affect PPI more. So the recent commodity price spikes going into goods have caused PPI to rise a lot more than CPI.

Furthermore, Bosworth pointed out that CPI also tracks housing, which is still stuck in the deep down cycle, whereas PPI does not track housing. This difference deflates CPI compared to PPI.

Ultimately, this means consumers are experiencing the prices on day-to-day consumer staple goods at much higher escalation than the CPI implies, and that producers eventually must either increase their prices to account for the rising input costs or tighten their belts to weather the low profitability. (Based on a recent mall expedition, the latter seems to be the case, at least for the clothing retail sector.)

Some, including the Fed, argue that since materials now account for a much smaller portion of the goods producing cost structure than in the past, as a result, the input cost inflation at the producers is unlikely to show up at the consumer level.

In other words, the Fed is counting on the stagnant wage, contained by the current high unemployment rate, to offset the rampant material price inflation partly fueled by QE2.

The services part of the overall cost structure will ultimately need to rise up to meet (at least reasonably) the actual rate of inflation, and the cost of living, or there will be a whole new set of social and economic troubles worse than the current 9.2% unemployment would entail.

Commodities have been on a tear ever since Bernanke’s Jackson Hole speech building up inflation expectation before the actual QE2 program even started. We caught a glimpse of the redux on Wed. July 13 when the Fed Chairman stunned the world in his testimony to the U.S. Congress that the central bank is ready for the next round of stimulus if the economy continues to weaken.

Crude oil shot up about $1.50 a barrel immediately after Bernanke’s QE3 talk which just goes to show the connection between inflation expectation and Fed’s quantitative easing. That might be one of the reasons for Bernanke’s follow-up qualifying statement that there’s no immediate plan for a third round of quantitative easing.

In the next year or two, it looks like there could be two scenarios emerging:

A new global crisis, for example, the U.S. fails to raise the debt ceiling, a wider-than-expected euro debt contagion, or a collapse of the euro.

Economic recovery really takes hold in the coming quarters with good jobs and GDP numbers.
For now the odds seem better for the first scenario. Nevertheless, either way, inflation and inflation expectation would only be shooting north. And this latest set of BLS inflation numbers seems to indicate the actual catch-up and pass-through of higher input costs from the producer to the consumer side is already taking shape.

Fed Chairman Bernanke told Congress that central bank officials anticipate that the recent rise in inflation appears likely to be transitory, where in fact the only 'transitory' effects are the QE3 euphoria and the once prevalent "deflation alarm".

Fed’s QE2 brought excessive liquidity on Wall Street that should have gone to the Main Street, which not only has weakened the dollar, dimished consumers' purchasing power, but also has artificially inflated asset prices. The damage to the economy far outweights the benefit of propping up the stock market, that not even a Strategic Petroleum Reserve sale by the IEA could mitigate the inflationary effect of QE2.

The recent economic, employment indicators and consumer sentiment basically have given QE2 an 'F' on the report card. So learning form the past two rounds of QE, unless Brent crude oil comes down to the high $70's to low $80’s a barrel range, and a more effective implementation and distribution system where the money would go to stimulate the real economy, QE3 should never even have been brought up in any kind of monetary policy discussion.

Of course, I'm speaking on the basis of financial common sense and logic, which may or may not be the course the Fed and Washington would take.

Further Reading - Why The Fed Must End Quantitative Easing

Disclosure - No Positions

By EconMatters

http://www.econmatters.com/

The theory of quantum mechanics and Einstein’s theory of relativity (E=mc2) have taught us that matter (yin) and energy (yang) are inter-related and interdependent. This interconnectness of all things is the essense of the concept “yin-yang”, and Einstein’s fundamental equation: matter equals energy. The same theories may be applied to equities and commodity markets.

All things within the markets and macro-economy undergo constant change and transformation, and everything is interconnected. That’s why here at Economic Forecasts & Opinions, we focus on identifying the fundamental theories of cause and effect in the markets to help you achieve a great continuum of portfolio yin-yang equilibrium.

That's why, with a team of analysts, we at EconMatters focus on identifying the fundamental theories of cause and effect in the financial markets that matters to your portfolio.

© 2011 Copyright EconMatters - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014