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

[outnow]

Time to make the wealthy feel the pain, not the working rank-and-file who haven't had a raise in four years or more. Keep interest rates level. Lowering interest rates will cause more problems. No bail out for the banks. Who is going to pay for that? Raise taxes, too, on the top 1%.

[themodernleader]

Near term, money in the stock market will evaporate for most investments.

[MaxundMoritz]

nothing is going to change,until the bodies of the wall street gangsters,banksters and corporate criminals,ceos and corrupt politicians start piling up in the morgues.

[kasa5400]

The Fed is to do what?

Normally, the response to inflation is to raise interest rates – makes borrowing money cost more so less borrowed money is available to spend therefore requiring income to support spending and demand decreases.

Problem is that the things largely driving the inflation are the increasing costs of food and fuel. The supply of these items is shrinking (food because of the politics-driven effort to use corn for food and make the farmers happy ) or demand is too high for supply (fuel when the US is 5% of the world’s population but consumes 255 of the supply and now others want their share of the pie) yet demand is far to difficult to shrink and will not drop in response to higher interest rate.

Absent more of a supply of food and food, prices will only continue to rise. That kind of inflation can not be stopped by tinkering with interest rates.

Keep lowering rates? The whole rate-drop thing has been a desperate attempt to prop up a wildly inflated and distorted market – housing. House prices are totally disconnected from any relationship to income, from the ability to actually repay the loan and from reality. All the rate cuts in the world can not keep prices inflated and that merryground going as Aunt Tilly and Uncle Jake do not, and never did, have the income to buy houses at those prices.

Keep lowering rates so Tilly and Jake will go to the mall and use their credit card? Doubtful – they are tapped out and can’t make the payments on their income.

Which brings it to income – the income that has stayed flat for 90% of the US the past 5-6 years while the income gains went to the top 5%, and enormously to the top 1% whose incomes has a 43% gain in the past 2 years.

Quit fiddling with interest rates. Give the wage-slaves a real raise.

[GreedyOldPsychopaths]

Economists are not giving us the big picture: Dollar DEVALUATION and DEBT are limiting further rate cuts, not inflation.

If the FED further lowers interest rates, they risk accelerating dollar DEVALUATION and the willingness of foreign creditors to continue financing our DEBT.

The Fed and economists historically have judged inflation trends by the core rate, not the overall, rate, which includes food and energy prices. While highly volatile, energy and food prices, historically speaking, didn't tend to rise faster or slower than other prices over time. But because of the devaluation of the dollar and increased world demand (China), energy prices, led by oil, are rising at unprecedented rates driving up costs for food, capital and consumer (commodity and durable) goods. This affects the worldwide economy similarly because of the dollar's reserve currency status.

These rising costs have the undesirable effect of slowing the economy. But flooding the economy with additional dollars will only exacerbate the problem. We're not in Kansas anymore Toto.

[BillZBubb]

The Fed has a terrible policy choice ahead. That is true. One thing you didn't mention is the impact that choice will have on the cratering dollar.

Bush and the Republicans have dug America into a deep, deep economic quagmire. There aren't going to be any painless ways to get out.

[usna73]

The Fed must NOT lower rates. Let the banks suffer the consequences of their recklessness during the Greenspan era. Providing more heroin to a drug addict is irresponsible.

We are much better off suffering a recession now. Inflation is always the cruelest tax that the poor will ever pay.

It is far more important that taxes are raised on the wealthiest citizens and the most expensive necessities,( health care, public transportation and higher education) are guaranteed to be affordable for the average working American. These people play fair and give back.

We are a rich enough country collectively to solve these problems.