Telling them what they want to hear

After Friday's report on Producer Prices, in which the overall monthly increase of 1.0 percent followed February's gain of 1.3 percent and ignited a stock market rally based on "easing inflation concerns", it should be clear that the relationship between prices and investor outlook is completely dysfunctional.

And the mainstream media is a dysfunction "enabler".

Sure, when food and energy are stripped out, the result was no change from the month prior and this "core" rate of producer price inflation is purportedly a better indication of the underlying trend when these "volatile" components are removed.

But that's a lot like looking at a burning garage, where the fire has not yet spread to the house, and concluding that the situation is under control.

A look at the 12 month percent change to overall producer prices shows an alarming trend since the beginning of the year when, after oil prices touched $50 a barrel, unrelenting price increases have been seen in all energy products, a situation that has been compounded by the impact that biofuel production is having on the price of agricultural products.

Yes, food and energy prices are volatile, but a simple moving average provides a much better indication of the trend in producer prices than removing major components that just happen to be volatile (and go up a lot).

Equity investors appear to be more than happy to look at a lower core inflation number that tells them what they want to hear - the Fed won't raise rates and the coast is clear.

Reporters don't help the situation. Aside from an occasional "if you don't have to drive or eat" quip, they pretty much go along with what both economists and equity investors want to believe.

This WSJ report($) from Friday captures the mood well.


This Reuters story from the LA Times does the same.


Is this all for the greater good somehow?

Despite the real-world experience of rising prices that individuals see around them all the time, we are all supposed to go along with the ruse of inflation being "contained" so that stocks will go up?

The consumer prices index comes out tomorrow - get ready for more of the same.