Wikinvest Wire

The current inflation numbers are meaningless

Wednesday, June 17, 2009

Some looked at the inflation statistics released by the Labor Department earlier today and said, "See? Deflation is here!"

Others looked at the same set of price data and replied, "See? Inflation is stirring".

They can't both be right, but they can both be wrong (or at least early).

The annual rate of inflation, measured against the price level of May 2008 (back when gasoline and other commodity prices were soaring), came in at less than minus one percent causing deflationists around the world to rejoice, yet stop short of getting out the bubbly.


Because, so far, this deflation is the Japanese variety, a wimpy version of the much more serious double-digit deflation as seen in the 1930s which, unfortunately, most deflationists fail to understand is no longer within the realm of the possible, unless of course we go back to something like a gold standard instead of printing up new money by the trillions of dollars to replace the dollars that are being vaporized in the ongoing waves of credit destruction.

Then again, since the Consumer Price Index has been effectively neutered by a 25 percent weighting of owners equivalent rent that, while purportedly representing homeownership costs, instead serves to dampen reported inflation. No matter what home prices or mortgage payments do, owners equivalent rent always seems to rise at an annual rate of two percent (even when home prices are falling by ten times that amount) serving as an anchor on the government inflation data.

Due to owners' equivalent rent, the U.S. may never see another double-digit annual rate of inflation - positive or negative.

These days, as far as government reported inflation is concerned, it's all about energy prices and, there, those seeing deflation have something to look at.
IMAGE Most of the year-over-year change in the overall consumer price index is either directly or indirectly related to the energy price peak last summer and comparisons to it, serving to distort whatever meaning the price index still contains.

But, the intriguing aspect of this morning's report on consumer prices is that you can see in-flation in the data too. After all, gasoline prices have soared more than 70 percent from about six months ago demonstrating the very real difference between $35 a barrel oil and the much more dear $70 type.

Inflationists (and the much more rabid "hyper-inflationists") look at this recent rise in energy prices and figure it to be a sure sign of things to come, what with all the government money printing that has occurred lately - a lot of the newly printed money seems to be going into the black goo.
IMAGE Anything that doubles in price over a six month period should grab your attention and, whether or not crude oil prices remain lofty in the months ahead is anything but assured, but it's important to remember that present day oil prices are still more than 200 percent higher than the average of the last few decades.

That was the era of modest inflation that many people naively think we're about to return to.

But, that period was really just a fluke.

Never again will the world have cheap, plentiful oil at the same time that clothes, electronics, and other goods are produced at cut-rate prices in the East, only to be sold in the West, and subsequently included in the West's inflation data.

Those seeing inflation in today's data see a world where prices are very different than they were in the latter years of the 20th century, the late-2008 plunge in prices being just a temporary setback to the inevitable higher prices to come.

In the scheme of things, what happened from early-2008 to early-2009 will probably prove to be quite irrelevant - either a blip that quickly fades from memory or a blip that is eventually dwarfed by other much larger blips.

It's way too early to tell.

However, what is quite easy to discern after the last year or so of price data, is that we've entered a very different world of consumer prices and even owners' equivalent rent may not be able to dampen the effects of the price moves in the years ahead.

We probably won't know for sure until sometime in 2010 whether we'll get debilitating deflation or hyper-inflation, though both remain unlikely, at least in my view.

The current inflation numbers are largely meaningless and anyone who reads too much into them does so at their own peril.


Justin said...

Hey Tim,

My short-term thinking is: with consumers overwhelmed with debt, rising energy/gas prices, increases in taxes to keep government running (be it direct taxes or indirect collected through law enforcement, which seems to be gaining popularity across the country) there won't be a back-to-school/holiday season this year. I see profits getting crushed come fall, city and state governments imploding due to tax shortfalls, more job loss, etc. In other words a double-dip recession with his leg down being slightly more severe that last fall. I'm thinking DJIA 3500-4500, and in turn, barring some major catastrophe, oil at $14/brl. I'm failing to see how we can possibly avoid this. What do you think?

Anonymous said...

Everything else will get crushed but money printing will devalue the dollar more than you are thinking.

Anonymous said...

Consumer debt to GDP has been stable since the crash, but financial sector debt to GDP has continued to rise. Things bought by financial institutions are likely to go up in price, while consumer prices rise at the rate the currency is debased.

dangermike said...

OER is a double edged sword. It has hidden the inflation due to last few bubbles pretty well but rents are moving far more slowly than a lot of other living expenses so that component is fairly well shielded from the down trend as well. Further, with what's been termed the grocery shrink ray and other mindlessly wrong selections of equivalent goods in the CPI, inflation numbers have been downright fraudulent for at least 10-15 years, if not longer.

Like I've been saying, I won't believe in deflation until I start to see my lunches getting cheaper. It's $7-10 for a fast food combo meal these days. Ten years ago, it was under $5. This puts us closer to an average of 5% per year if my back-of-the-envelope math is right.

Bruno T said...

I also like to vist a mix of "daily life" examples to see if we're experiencing inflation or deflation in the aggregate.

Quite right, fast food meals are up quite a bit, unless you go to the "value meal" items they include to catch that part of the market.

Despite claims of massive discounting, Disney World isn't any cheaper. Ticket prices actually were raised since the start of the recession. Hotel rooms there are "discounted" but only for those making long stays (7 days for price of 4) where they know they'll induce enough people to stay longer than otherwise to make up the difference.

A room at the contemporary resort there is over $400 AFTER the peak season, full rack rate, and nearly impossible to find a discount on. The cheap rooms built to handle boom times may be emptier, but that's only part of the picture.

Cars. Wow. MASSIVE price increases in used cars and trucks since this winter. Used Infinitis that were going for $22,000 are now $25,000 and pickups rose so fast for non-defunct brands I was priced out of that market and into a Chevy instead. F150 work trucks were avaialable for $16,000 last January. Try more like $20,000 today.

They have cut back capacity in everything. Most of the "deflation" was nothing more than fire sales to reduce high inventory, and once that is gone, so is the "deflation". Same goes for Real Estate. It will take years, but once that is absorbed look for homes to rise with inflation, same as they always did years back.


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