Inflation Is Getting Worse

Last week we got two key pieces of economic data: the Producer Price Index and the Consumer Price Index. Both releases indicated that inflation is getting worse.

From the BLS:

The Producer Price Index for Finished Goods rose 3.2 percent in November, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This gain followed increases of 0.1 percent in October and 1.1 percent in September. At the earlier stages of processing, prices for intermediate goods moved up 3.7 percent after rising 0.1 percent in the prior month, while the crude goods index increased 8.7 percent following a 2.4-percent advance in October.

.....

Before seasonal adjustment, the Producer Price Index for Finished Goods advanced 1.6 percent in November to 171.3 (1982 = 100). From November 2006 to November 2007, prices for finished goods rose 7.2 percent. Over the same period, the finished energy goods index climbed 23.6 percent, prices for finished consumer foods increased 7.3 percent, and the index for finished goods other than foods and energy moved up 2.0 percent. For the 12 months ended November 2007, prices for intermediate goods increased 8.1 percent, while the crude goods index jumped 22.4 percent.

Here is a chart from Econoday of the year over year percent change in PPI

From the BLS:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in November before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The November level of 210.177 (1982-84=100) was 4.3 percent higher than in November 2006.

.....

During the first eleven months of 2007, the CPI-U rose at a 4.2 percent seasonally adjusted annual rate (SAAR). This compares with an increase of 2.5 percent for all of 2006. The index for energy, which increased 2.9 percent in 2006, advanced at an 18.1 percent SAAR in the first 11 months of 2007. Petroleum-based energy costs increased at a 30.8 percent annual rate and charges for energy services rose at a 3.2 percent annual rate. The food index has increased at a 5.3 percent rate thus far in 2007, following a 2.1 percent rise for all of 2006. Excluding food and energy, the CPI-U advanced at a 2.4 percent SAAR in the first 11 months of 2007 after increasing 2.6 percent in 2006.

Here is a chart from Econoday of the year over year percent change in inflation:

The Fed is now in a really terrible bind. The economy is clearly slowing so they want to lower rates. But look at the yearly increase in food and energy costs at both the wholesale and consumer level -- those are big jumps. These charts --

for agricultural prices

and oil

are really starting to hurt. That means the Fed is pretty much hemmed in. If they lower rates further they run the risk of getting seriously behind the inflation ball. But if they don't lower rates, the stand the chance of getting behind the economy ball. Simply put, it's a terrible place for a central bank to be in.

About the only good thing to emerge from all of this is the Fed seems to have dropped their "core inflation" policy and are looking at total inflation. This is from the latest FOMC statement:

Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Hopefully, the Federal Reserve is now paying attention to all the numbers rather than the numbers that simply look good.

I think these inflation figures are one of the reasons the Fed signed up with all those other central banks. That would allow the Fed to add liquidity without lowering rates and possibly stoking inflation further.

Either way, Bernenake and company have a really terrible policy choice ahead of them.

Comments

[FreedomCorpse]

Yep Hale, those graphs are pretty nasty looking but we've been feeling it for quite awhile. Though usna73 is quite correct that we are a rich enough country collectively to solve all these problems, there is extremely feeble political will because corporations (or private central bankers otherwise known as the 'fed') own the politicians and the 'agenda'. If we are extremely lucky, we might be reading good economic news from you in 3-5 years...which would be great...if I believed in luck but faith-based economic theory isn't something I subscribe to.

[olephart]

The cumulative understatement of inflation over the past 25 years has been about 70%. The reason that many people feel as if they have been losing ground is because they HAVE been losing ground. This is about as simple as I can state it. Not only are we getting it in the ass, there's sand in the KY.

[NavyMom]

Food prices are definitely rising fast. I'm not sure I totally buy the corn going into ethanol idea. All that stuff in your supermarket didn't come from a farm down the street-it was brought in by truck and ship, mostly from very far away. Fuel costs have to affect food costs a lot.

[mmckinl]

And inflation will not stop getting worse without a worldwide recession ...

Our currency is only part of the problem. The other factor is that tens of millions of Chinese , Russians , Saudis and Indians now have more purchasing power and they want to live like us ...

More food , more energy and more luxuries , all of which are finite commodities that are now being bid up.

So , along with suppply side inflation (too many $), we have demand side inflation (more affluency worldwide).

This will only continue until a major recession or depression hits us all.

[peaceandfreedom]

Hale, why then does this article
http://online.wsj.com/public/article/SB119784514764832443.html?mod=blog
claim that we will avoid a recession with no problem? I agree with your take, but when the WSJ talks, many people listen...what's up with that?

[MilwaukeeDan]

Bonddad, you are correct, it's either inflation or recession, pick your poison. I haven't believed the inflation numbers for years, because I live in the real world and pay the bills. What you will get is what's better for big business, so you know where that will leave us.

[fourex]

Charts and facts destroy faith based economics.

[wsblake]

It's crazy , but the biggest expense we all have- our housing cost- is not even counted in the CPI. And housing costs have been rising steadily since the 1980s and skyrocketing since the 1990s. Most of the huge costs in housing have come from the artificially inflated market created by the Wall Street booms of those decades due to unregulated speculation practices. Then you couple that with the subprime scandal of late and you have housing costs that few can meet. Wall Street speculators make a killing for years, spend inflated sums for homes and we all have to suffer the consequences.

[mamacat]

Adjusting interest rates amounts to tweaking the economy. Running up trillions of dollars of national debt, in order to give tax-breaks to a few of the ultra-wealthy, is not going to be solved by tweaking the economy.

[opines]

Real inflation has been escalating by quantum leaps for the past 12 months. Since food, oil & gas and health costs are critical items to most Americans, it would be instructive to see figures on how much those items have increased in 2007.

For years the real rate of inflation has been understated because Social Security would be bankrupted if COLA's reflected the true rate of inflation.

Before Bernanke's first rate cut he testified before Congtress that inflation was under control. This outright lie was necessary to justify the rate cut that Wall Street was demanding.

The successive Fed rate cuts have blown away critical restraints on inflation.

Bernanke's attempt to bail out Wall Street speculators and arrest a DOW plummet will result in a free fall for the dollar and runaway inflation.

Not to worry. The Pentagon has already printed khaki colored scrip to replace the greenbacks early in 2008.

[MadAppraiser]

The American Central Bank is the cornerstone of the American banking dynasty. The American central bank in concert with the central banks of other nations monitor, and adjust macro and micro economic factors on a world scale. Is the sub prime mortgage debacle a surprise to the American Central Banking economists at the 12 regional Central Banks? These same private and public sector architects that monitor American economic institutions gleefully watch the outstanding national debt dial indicators spin like Las Vegas or Atlantic City slot machines. Economists constantly make a concerted effort to convince American citizens that they are in control of the fiat currency. I am not referring to the Fiat Italian Automobile Corporation that owns historically significant Alfa Romeo, Ferrari, Maserati, and Lancia automobile racing marques.

Leading American economist often express the glorious wonders of free market economies, but who is the real winner or loser? Russian liquor stores, organized crime, and elite Chinese athletic programs profited from the introduction of capitalism in Russia. Some elite Russian athletic trainers (PHD’S) migrated to China to avoid Russian taxicab and menial jobs. The American residential real estate industry is in the basement, and a large number of competent real estate professionals for a long time attributable to the sub prime mortgage gravy train. The American businessman’s bottom line is often a difficult reality for individuals beyond the 1% percent club! American politicians currently ponder how they can place band-aids on the sub prime mortgage debacle that will protect banking/mo­rtgage-len­ding institutions, and appease their political constituencies.

It is not going to be long before American citizens realize that they have been sold that bridge in Brooklyn, New York in terms of important news coverage. We rely upon rapidly decreasing media information conduits for often terribly distorted contemporary news coverage formats that often emulates the entertainment media. Our media heroes cannot help us this time! Is that 1% that controls the American economy the only economic winners in America?

[PTodd]

The problem is that inflation numbers provided since 1993 don't represent real inflation. It is being under-reported by 3-4% using different tricks (eg health care costs are weighted at 5.7% despite the average cost per person at 7500 per person per year, higher home prices are not included, instead they use equivalent rent and rents were flat, if steak goes up they say people eat hamburger, if electronics stay the same price but are slightly improved, they have negative inflation, etc) .

Using the same methodology for CPI calculation in 1992, inflation is over 7%.

The Feds main job, they say, is to maintain price stability. Yet the bankers make money from inflation. What to do, since the Fed is run by the bankers? They pretend there is no inflation while allowing the bankers to make money from the inflation caused by the increasing money supply, compensated by salary deflation for those in the bottom 90%.

They say income is keeping track with inflation, yet in fact, using pre-Clinto­n/Greenspa­n CPI, the average salary in 1990 is 15,000 more per year in todays dollars than todays average income (53K vs 38K)

Home prices, oil, food, etc. all kept up with real inflation.

The dollar devalued once other countries figured out what was going on, making imports more expensive. Exports increase, yet what we export are capital goods and services to support the migration of our businesses to China, which will mean higher imports and fewer high paying jobs. Tax cuts for the rich and corporations used to mean more domestic investment and more jobs, today they use the savings to downsize and move abroad.

Sub-primes? For property prices to keep track with inflation, peoples salaries had to keep up with inflation. Since they were not, people could not afford to buy a house. The solution was sub-primes. At some point, prices and income have to come to an equilibrium, and that means deflation in the property market.

More information here on CPI:

http://www.shadowstats.com

[nomoredead]

Heres some of the money....go to..xinjo.com Oct 2007 'A Little Visual Perspective on the 87 Billion Being Spent in Irag.'

[ramal]

Go read "Clusterfuck Nation" by James Howard Kunstler at www.kunstler.com. It ain't going to be pretty folks.

[AMolinaro]

Can the Fed really do anything to stave off the coming economic collapse? The irresponsible financial sector has overblown the value of derivatives markets past any point of rationality, and this must lead to a harsh correction. Even if the interest rates were reduced to zero, it could not stimulate enough growth to counter this.

The value of the dollar is yet another issue entirely, as we import more goods and our dollar becomes weaker due to record trade and federal deficits, the purchasing power of all Americans will doubtless be harmed.

Faith in central banks is one of the factors that got us into this predicament, they surely won't be the ones to save us.