Wikinvest Wire

Consumer prices flat during September

Thursday, October 16, 2008

The Labor Department released the September consumer price data a short time ago. Overall, prices were flat in September and 4.9 percent higher than a year ago as shown below, but an interesting relationship is now developing between food and energy prices.
IMAGELed by tumbling crude oil prices and the biggest decline on record for natural gas, energy prices fell 1.9 percent last month with further declines expected in the month ahead. Crude oil futures averaged $103.76 in September but are now in the low $70 range, meaning that next month's decline in energy prices should be even steeper.

While most categories posted their typical monthly numbers - medical care up 0.3 percent, recreation up 0.2 percent, etc. - it is food prices that will hold most of the intrigue over the next few months.

Up 0.6 percent last month and after having risen at a compound annual rate of 8.5 percent over the last three months as commodity prices tumbled, it remains to be seen which direction they will go from here.

Many retailers were reluctant to pass on rising costs to consumers earlier in the year and, having just come back from a trip to Costco where prices for all of life's basic necessities continue to rise at an alarming rate, this remains the big question for the period ahead.
IMAGETo be clear, we will never, ever see 1970s style inflation again - at least not until the housing market returns to something other than the freak-show it's been so far this decade. The 42% share of "housing" costs, the bulk of which is "owners' equivalent rent" instituted in 1983, virtually assures a neutered version of the price index for many years to come.

But, if food prices do not moderate, or if they continue to rise, this will become an even bigger source of angst amongst the population and may cause even more individuals to distrust the government's version of inflation.

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Nostradamus, apparently said...

Well, I'm confused...

I don't see the word "core" in your analysis at all. I also don't see it in main stream reporting on this report from BLS.

So, what happened to CORE inflation that excludes those pesky, volatile items such as food and energy?

I suspect that, since energy prices dropped so much, the government is trumpeting the overall CPI today rather than the core CPI they normally try to hide behind.

Once again, "figures lie and liars figure" comes to mind.

As to whether we'll see 1970's inflation again... that depends on whether you want to use the government's reported inflation numbers or whether you want to use the real world numbers we all live with every day.

It's apparent the government will lie to us as long as we'll take it. So, it's useless to look at official figures to gauge inflation. You'll have to go to or something similar to get a feel for it.

Anyone who trusts the government's figures on anything is a fool and very, very uninformed.

Sadly, the guy who gets a 3% raise over last year thinks he's doing fine even though his cost of living went up 5% in the same time period. Actually, he lost 2% and that loss will compound year over year over year.

I guess that 'advanced' math skills like that are just too much to ask for among most people.

And, of course, that is exactly why the government officials can get away with the ridiculous lies they tell as long as they can.

Eventually, when people simply can't afford the basics, then they'll understand inflation.

Hyperinflation is a real threat for us and it would be nice if people would wake up and demand an end to this madness of printing money and dumping it into circulation.

Even if oil drops to $20 bbl, it doesn't matter if the value of the dollar has dropped more in that same time frame.

Scary stuff if you don't fancy an American version of a Weimar Republic.

Chuck Ponzi said...


I'm sorry that I don't share your sentiment about hyperinflation in the slightest.

It's hard to maintain wage-price spirals that the 70's brought us because employment is so weak. Any inflation is not picked up in income and so therefore is not self-perpetuating.

Many things have changed since the 1970's, most notably a productivity shift that has created a general lower demand for production-related labor (in the US) and a higher demand for so-called "information-worker" jobs. That's why Tim can more or less support the rest of his life on his previous income of engineer without probably ever using a machine to produce anything directly. Once those investments are made, the marginal cost of production drops dramatically. This is why flat-panel tvs would have cost a million dollars in 1970, but now are $1000. The same reason that food is substantially lower today in real terms than 30 years ago. I grew up in the corn belt and saw first hand the growth of mega farms and "loss" of jobs to automation. Textiles, mining, plastics manufacturing, and auto production have all experienced this. Productivity is price-deflationary. That is what is counteracting the massive monetary inflation that was present in the last 5 years. The reason it didn't show up in all consumer prices was because it didn't need to since people can only consume so much food. Instead it went into other "assets" such as housing, high-end cars, etc. We'll continue to have rolling bubbles until productivity gains abate as the FED tries to fight "price deflation" from happening.

This is only my opinion, do not make investment choices based on it. I respect your opinion and admit you may in actuality be right. Good luck to us all.

Chuck Ponzi

Nostradamus, apparently said...

Hi, Chuck!
Thanks for your input.
Check me...
Are you saying that productivity gains will always outstrip increasing M3?
I'm saying that increasing money supply will cause commodities (as opposed to labor prices) to soar.
I believe the problem will be felt in the cost of food and energy as commodities. I don't believe wages will rise dramatically enough to cause prices to increase. It may be the other way around but wages won't keep up.
In that sense, the 70's won't happen again. But, in the overall view, inflation will soar.
As for rolling bubbles...
A 'bubble' to me is when the price of an asset class far exceeds its fundamental value because of excess demand. In this case, it was housing due to easy credit and last time it was stocks due to tax policy.
Those are not likely to happen next due to the massive debt. Instead, we'll have inflation as too many dollars are printed to chase after too few commodities that are considered necessary.
As you say, I could be wrong and you may be right.
I mostly wanted to clarify that I don't expect the cause of this inflationary period to be rising wages and thus prices. The cause of the inflation I see today is not the same as the 70's.
The effect, however, will be more dramatic than the 70's if I'm right.

Chuck Ponzi said...


You have excellent points. Good questions too.

I don't believe that productivity gains will outstrip M3, or that they're even really that important at this point.

Basically, from an Econ101, Wealth of Nations perspective, markets with many suppliers and large productive capacity with small marginal cost of production will mean that prices will have a large elasticity of demand. Oil and many commodities is the opposite. It has a very inelastic demand curve.

I don't believe that you can have long-term high inflation (more than 5 years) without rising wages. Essentially you get imbalances like what happened with the housing bubble. People could just not afford housing anymore. Prices had to fall back to fundamentals. The same with commodities, except we had a weakening global economy that I don't see coming back anytime soon.

Generally, oil consumption is seen as very inelastic (in the short run), but in the long run, can be very elastic. I wouldn't be surprised to see reduced oil consumption per capita in the US for the foreseeable future due to the most recent oil shock. I think that's a good thing. We'll be getting our energy from other places hopefully, or we'll suffer a serious degradation in quality of life.

The lifeblood of a bubble (and its resultant size) is the credit that created it. I'll disagree with you that the stock bubble of the 1990's was created by tax policy, although that had a major impact on it. The growth of stock options and margin was in my opinion a larger culprit which allowed prices to exceed rationality. An expanding monetary base and dismantling of the bank/broker relationship was a major factor in that as well.

For better or worse, there were a lot of dollars sloshing around in 2002 which the FED did not mop up, and increasing leverage set the housing rocketship up on its debt fuel. All of those "dollars" are disappearing. Much of which was spent in the real economy and did not create substantial price inflation at the time. I believe the disappearance of those dollars via lost property values will definitely impact spending. I can see a monetary deflation of 3T+ from this bubble bursting. Even our 840B reinflation does not seem large enough for me to believe that we will "unlearn" the risk aversion we just got in the last year.

As to your last point, I am not sure that there are as many dollars left that you believe are there. I don't believe that commodities will be chased because so much wealth and money has evaporated. Just like it was created out of thin air through leverage, deleveraging has removed them.

Still, you may be right, but I don't know if there is enough information available at the present time to disprove either line of thinking, the uncertainty is what is keeping a lid on commodities prices and stock prices at the present time.

Chuck Ponzi

Nostradamus, apparently said...

Hi, again Chuck
Thanks for the info and your thoughts.
I'm quite sure 2 guys surfin' the web don't have enough information to be completely right but it's fun to exchange ideas and make predictions. It's kind of like betting on horses.
It's interesting that you see a $3T deflation because that's exactly the amount I'm seeing the fed just "printed" this year to bail out and boost the US economy.
In fact, I think Tim has a new post on that very point right now.
That means ALL of that deflation/deleverage has already been accounted for - and we're just getting started.
IMHO, there is an unlimited supply of dollars available because there's nothing to stop the fed from 'printing' them. That's really the point of hyperinflation and is exactly why I think it will happen.

With no gold standard or anything else to stop them, the fed will print as much as they can.

For example, today the SS admin. announced an unusually large increase of more than 5% for next year. That, IMHO, is a perfect example of what is going to keep happening in an effort to keep people spending and happy.

Also, Congress is now talking about another stimulus package. Same thing.

Where does that money come from? It's just printed.

In truth, we're going to see about $6T in fiat US money flood the world over the next year or so as the fed struggles to handle the recession and pushes it into depression.

That's the classic set up for hyperinflation.

I'm prepared for a complete melt down if it comes to that. I mean PREPARED to survive off the land, if necessary.

If the melt down doesn't happen and we just get inflation, then I'll enjoy the high CD rates again with my cash.

If nothing special happens, then I'll just keep surfin' the web!


BrunoT said...

I have a hard time believing that massive amounts of "printed" money can ever be a good thing, or that it will ever just "even out" with the deflating price of certain asset classes.

My theory is that other than housing tempoarily, items closer to "neccesary" will go up in price and all those things we bought that we didn't need will go down
(tvs, new cars, vacations, etc), at least until we reduce the excess capacity for those items we now have (like houses)at which time they too will rise.

I can't see any end to the money creation via bailouts, "stimulus" checks, and plain old fashioned deficit spending. If we were running huge deficits during a boom, imagine what they'll be in a bust.

So for that reason I think we'll see disinflation followed by high inflation

September's numbers were totally expected. We have to work off all the excess inventory in oil, housing, autos, even food, first.

Note how medical care and food, which are fairly demand inelastic(i.e. "necessary") rose even in Sept.

So we may see a dichtomy of some items plunging while others soar in price. Look for education and recreation to tumble as debt fueled much of that spending.

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