The Inflation Picture Is Not Good
Yesterday on my blog I wrote a series of articles on inflation. The bottom line is the inflation picture is not that good right now. This has incredibly important implications for Fed policy. If the Fed lowers rates too much they run the risk of stoking inflationary pressures. That means that on the flip side of the current economic mess we run the risk of having to increase rates too quickly to deal with inflation. That move will slowdown the then underway expansion.
In addition, we're in a period of declining purchasing power for the average consumer. Note that energy and food inflation are increasing. As the cost of necessities increases more and more people will have less and less money available after buying all of their monthly necessities.
As the information below indicates, inflation is a problem. And it is growing.
I've written this title a bunch over the last few months, largely in response to a story of a few commodities hitting new highs. However, I haven't looked at a ton of charts and compiled them into a master list. So here is that list.
First I went to Futures Trading Charts. Then I looked at their futures charts for agricultural and energy commodities. I found 18 charts that show major price moves. All of them are listed below.
If this were one commodity I would dismiss it as a commodity specific price disruption. However, we're looking at major league price spikes across the spectrum of goods. That's a huge deal and it indicates a fundamental development in the markets. I stand by my standard explanation 101: with India's and China's standard of living going up, it's only natural the demand curve gets moved to the right. That means increasing prices.
I eyeballed the gains, so they might be off by a few percentage points either way but you get the rough idea.
Aluminum
Copper
Platinum
Silver
Gold
Canola
Cocoa
Coffee
Corn
Oats
Rough Rice
Soybean Meal
Soybeans
Wheat
Brent Crude Oil
Heating Oil
Light Crude
Propane
Now for the final question. Here is a graph from Martin Capital of Productivity.
Are the gains on this chart enough to absorb all of the cost increases demonstrated in the charts above?
Finally, given what the charts above show (who are you gonna believe -- government statistics or your lyin' eyes?) is this really a good environment to start lowering rates?
China's consumer prices surged by 7.1% in January, exacerbating the dilemma for policymakers who face both weakening global growth and a domestic economy still at risk of overheating.The acceleration in inflation, up from 6.5% in December, came after heavy snowstorms in late January froze power grids and shut down road and rail transportation across much of southern and central China. The severe shortages of daily necessities that followed helped push the monthly inflation reading to its highest level since September 1996. And the snow's impact on prices is likely to be felt further in coming months, as it killed farm animals and damaged crops across a large part of the country.
The continued price increases, which have been gaining speed since early 2007, make it more difficult for the government to stimulate the economy to counter the recent financial-market turmoil and economic slowdown in the U.S. and Europe. China's inflation is still confined almost entirely to food -- where prices rose 18.2% in January -- but officials are concerned those increases could feed into bigger price spirals that would be much more difficult to contain.
All China has to do is go to a core inflation policy and everything will be OK.
China's producer prices rose last month at their fastest rate in more than three years, adding to the inflationary pressures confronting Beijing policy makers.Producer prices rose 6.1% in January from the year earlier, data issued by the National Bureau of Statistics showed yesterday. The figure was up from 5.4% in December and was the highest since December 2004.
Curbing inflation and excess liquidity remain the focus of China's economic policy as producer prices, along with other recent economic data, suggest that the impact of the global economic slowdown hasn't been obvious in China so far, said Tao Wang, a Beijing-based economist at Bank of America Corp.
"The growing inflationary pressure, especially with buoyant export and money-supply growth, points to the necessity for China to continue its tight monetary policy," she said.
It's not just a US problem now, is it?
Oh yeah in case you missed this on Friday
The January increase in overall imports resumed the upward trend of the past year after a 0.2 percent decrease in December. The index, which had risen 3.1 percent in November and 1.5 percent in October, is up 13.7 percent over the past 12 months, the largest year-over-year increase since the index was first published in September 1982.
But we should be lowering rates right now....
Above is a long-term chart of the dollar. Notice the chart is in a clear bear market pattern of lower lows and lower highs. Remember that most commodities are priced in dollars, so as the dollar drops in value the value of these commodities by definition increases.
Above is a daily chart of the dollar. There is some good news here. Notice the dollar is consolidating above its recent lows, indicating traders have bid up the dollar a bit. Also note the simple moving averages are bunched, indicating a lack of direction. This is better than all the SMAs moving lower. It looks as though traders are wondering of the dollar is fairly priced right now, or whether it was fallen enough and should be higher.
Finally, above is a chart of the percentage increase from the previous year in MZM which is defined as:
A measure of the liquid money supply within an economy. MZM represents all money in M2 less the time deposits, plus all money market funds.
That's a big damn increase.
Finally, consider this chart from Shadow Stats:
The CPI chart on the home page [as reprinted above] reflects our estimate of inflation for today as if it were calculated the same way it was in 1990. The CPI on the Alternate Data Series tab here [the chart above], reflects the CPI as if it were calculated using the methodologies in place in 1980. Further background on the Alternate CPI and Ongoing M3 series is available in the Archives in the August 2006 SGS newsletter.
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Where on your chart does it show the guilty ones at the top (the criminals who have millions and beg for more because their practices are obviously unsustainable) loosing everything and going to prison where they belong?
When economic events spin out of control, as are now happening, Fed policy has little influence.
Bernacke and Fed feverishly lowers the discount rate to encourage borrowing and lending. Yet, the borrowing costs are skyrocketing. And both public and private bond issuers can not find buyers for their issues except at astronomical interest rates. Real interests rates will compell the Fed to precipitiously raise the discount rate with the actual rate as events spiral out of control.
Therefore, nothing of consequence will happen until the entire bankrupted system collapses and prudent investors and policy makers begin the painful process of reconstructing a rational economic system.
In the meantime, there will be unprecedented suffering and civil unrest, such that the whole society could fly apart into a squalor of ochlocracy and dictatorship.
All Americans, especially the powerful and newly emerging powerful, must exhibit extreme patriotic flexibility, pragmatism and wisdom for the common good to provide a core for the preservation of the Republic.
We must never forget that unbriddled economic power of selfishness, self-centeredness, dishonesty and fraud brought us to this terrible and dangerous condition.
There is a great sentence enclosed in a HuffPo entry at http://www.huffingtonpost.com/2008/02/22/oil-prices-hold-above-98_n_87933.html:
"Prices have spiked in recent days on buying fueled in part by investors attracted to the oil market as a safeguard against inflation and a falling dollar."
Sweet, huh?
Rising energy prices drive inflation, so the consumer spends more on transportation and food and less on durable goods and services, so the Fed lowers interest rates to drive more consumer spending, so the dollar goes down, so the high rollers move their money into oil futures to protect themselves from the falling dollar and inflation, so energy prices rise in response to the falling dollar and demand-side pressure from the high rollers, so rising energy prices drive inflation...
Hey, that is a loop!
Excellent analysis, steve, and spot on. These guys are pros, for sure. This is what they do. Hey, look over there....
Seems to me the tools available to the gov't to achieve the result they want are less effective now. When oil-prices are at an all-time high pushing costs of production and transport higher AND you have a "strapped" consumer, you have a confluence of critical ingrediants to create stagflation--less money chasing more expensive goods. This is not "pretty" and will only get MUCH worse!
I’m having trouble understanding this! Everyone’s talking inflation but I see indications of just the opposite, deflation. This nation has a large inventory of unsold homes. Housing construction has come to a stop and builders are selling existing inventory for as much as 50% off the original price. According to “Dr. Housing Bubble” prices of existing homes in Southern California are beginning to drop, and spectacularly so. www.doctorhousingbubble.com//) A chain of layoffs spreading from the housing sector all across our economy is highly likely. With the credit crunch and most families totally tapped out, where can the upward pressure to raise prices and sustain them come from? Last year’s slow Christmas sales may be just the beginning of a downward spiral that feeds on itself.
Your charts clearly show increases in commodity prices but it may just be a matter of time before those prices turnaround. Trends aren’t forever.
The sub prime mess promises to be the gift that keeps on giving as these mortgages will continue to reset upwards. Even someone with a conforming mortgage would not want to live in a neighborhood that’s become a ghost town. It makes sense that a very large number of Americans are going to just walk away from their homes and mortgages over the next several years sustaining the credit crunch. This may last past 2012 before it’s over!
We are heading back toward the days when apples were 5 cents each and no one was able to afford one.
"(who are you gonna believe -- government statistics or your lyin' eyes?)"
Oh, I think you know the answer to that one, Bonddad. Love your charts. Keep it coming.
First, thanks for bringing us the Shadow Government Statistics for inflation. As you pointed out in a previous post on January 18, 2008:
"While there has been some talk of stagflation recently (high inflation and slow growth) I think it's way too early to be making that call. If year-over-year inflation hits 7-8% then stagflation talk is warranted, but not until then."
At that time I suggested we were already there. The January unemployment number, unadjusted U-6, was 9.9%. Wages, as everyone here will attest, are not rising. Thus with the inflation you now have documented I reiterate, STAGFLATION! We will experience the worst of all worlds, increasing costs of living, no wage growth and higher unemployment. Add to this witches brew piles of consumer and Government debt and you've got an economic spiral of death. The Fed may as well lower interest rates; print money and the Government borrow and scatter as much as they can because everything is going to Hell anyway. This is the end game of Bushonomics. A depreciated dollar, a dilapidated credit score, a military disaster and an economy in the doldrums.
I forgot to mention the collapse of home prices. Far from having equity to fall back on, many Americans’ homes are now liabilities, not assets. I believe that the amount of home equity was already at a historic low BEFORE these prices started to collapse. Home prices are on a tenuous ledge and they’re tilting downward. Don’t be surprised if millions of so called prime loans go belly up with their sub prime cousins.
As I mentioned in the January 18 article:
“Watch the employment numbers in retail. Watch the small business bankruptcies. Watch the economic stimulus package yield a speed bump in the road to disaster.”
A separate article here reports the bankruptcy of two retailers today.
On a lighter note, since Americans will have little money for anything but essentials, most of the crap that we have been buying will rot on the shelves. This will mitigate some aspects of the inflationary spiral.
Olephart, still here? Need to hear more about this "shadow government" idea.
The link to the Shadow Stats homepage. Note that inflation as calculated during the time of Stagflation is running 12%.
http://www.shadowstats.com/
Here is the link to the Bureau of Labor Statistics. Scroll to the bottom and select Table A-12 Alternate measures of labor underutilization. Note that the Jan. 2008 non seasonally adjusted unemployment rate U-6 is 9.9%.
http://www.bls.gov/news.release/empsit.nr0.htm
Now check out the Bonddad Blog. Scroll one quarter of the way down (Feb. 21) to the headline for Stagflation. Notice his comments that "we are nowhere near the problem levels we saw in the 1970s."
http://www.bonddad.blogspot.com/
If you plug in the Shadow Stats inflation number of 12% and the BLS U-6 number of 9.9% unemployment you will notice yourself very close to the 1975/1981 Stagflation scenario.
Everything is there for all to see. Nothing is a mystery, no genius is required just avail yourself to reality and plan accordingly.
First, thanks for bringing us the Shadow Government Statistics for inflation. As you pointed out in a previous post on January 18, 2008:
"While there has been some talk of stagflation recently (high inflation and slow growth) I think it's way too early to be making that call. If year-over-year inflation hits 7-8% then stagflation talk is warranted, but not until then."
At that time I suggested we were already there. The January unemployment number, unadjusted U-6, was 9.9%. Wages, as everyone here will attest, are not rising. Thus with the inflation you now have documented I reiterate, STAGFLATION! We will experience the worst of all worlds, increasing costs of living, no wage growth and higher unemployment. Add to this witches brew piles of consumer and Government debt and you've got an economic spiral of death. The Fed may as well lower interest rates; print money and the Government borrow and scatter as much as they can because everything is going to Hell anyway. This is the end game of Bushonomics. A depreciated dollar, a dilapidated credit score, a military disaster and an economy in the doldrums.
I forgot to mention the collapse of home prices. Far from having equity to fall back on, many Americans’ homes are now liabilities, not assets. I believe that the amount of home equity was already at a historic low BEFORE these prices started to collapse. Home prices are on a tenuous ledge and they’re tilting downward. Don’t be surprised if millions of so called prime loans go belly up with their sub prime cousins.
As I mentioned in the January 18 article:
“Watch the employment numbers in retail. Watch the small business bankruptcies. Watch the economic stimulus package yield a speed bump in the road to disaster.”
A separate article here reports the bankruptcy of two retailers today.
On a lighter note, since Americans will have little money for anything but essentials, most of the crap that we have been buying will rot on the shelves. This will mitigate some aspects of the inflationary spiral.
This economic atmosphere fits in nicely with a draft, doesn't it? Less financial gains/opportunities and no stable retirement plans for the working class mean less resistance to joining the military.
When you're about to lose your house because you're using part of your mortgage payment to feed, warm & educate your family, your 401(k) along with your wages are flatlining/stagnating, makes that "signing bonus" so much more attractive.
The top 1% really are ghouls. I can't wait to interrupt their fantasy by voting them & their reps all the hell out of office.
Good, as much as I hate to think that, it is true. Even getting the ghouls out of office won't get them out of the control room. We have to lock that room and cut off their communications. Then we'll interrupt their fantasies.
Low interest rates only cause inflation if people can access the money.
In the current environment, with most Americans debt load so high, and financial institutions making it harder to get loans, and the housing markets down, low interest rates might not drive inflation.
It seems to me that a booming stock market would have a bigger influence on inflation but the Fed has been effective at keeping those numbers down.
Bonddad:
I think you are locked into the economic rules about interest and inflation. In my opinion, inflation is much worse than the numbers indicate, and household debt is so high, and when you add that to the financial industry's knee-jerk reaction to the foreclosure debaucle and a lowering housing market, credit will not be available on the mass level needed to increase inflation.
The spending power of the dollar is fortified by massive government deficits in the short run, but in the long run, the deficits undermine the value of the dollar. In otherwords, fiscal policy has already created these inflationary trends that WILL happen with time and raising or lowering interest rates will not effect this much. Sound fiscal policy will fortify the dollar over time, but no one want to sacrifice their standard of living today, so that we might live better tomorrow.
SAD
Maybe the US trade deficit is coming back to haunt us? The US printed a ton of money and bought tax cuts for the rich, a lot of imports on credit, and an expensive war in Iraq, etc. By shipping the money overseas we temporarily avoided inflation ourselves, but probably merely exported it to the rest of the world. After all, unless the Chinese and Japanese governments just sit on all of the dollars, they will have some effect. My guess is that a fair amount of the deficit was not immediately deposited in China's hoard of dollars, but was instead put into the hands of Chinese and Indians consumers. They are using these dollars to drive up commodity prices worldwide {which by definition includes the US}.
It is also possible that the Bush administration has intensified the transition to markets managed by oligopolies of giant corporations. These might be capable of increasing their profits by forcing prices up. Just as corporate types used to blame wages for inflation, it is possible that the tilt toward oligopoly creates inflation by increasing profits. If those profits are not reinvested in increasing resource stocks but are instead used to diversify {or distributed to shareholders}, they will have the same effect as a tax on commodities for which demand is price-inelastic {like food}.
It seems that we (as monetarists) have grown to believe that inflation is like blood pressure. And that as blood pressure responds to lipitor, inflation responds to adjustments of the fed funds rate. Dr Ben Bernanke spends his days at the lab testing the blood pressure of the patient and then making his prescriptions to increase or decrease the amounts of medication.
It does not really work this way. If Ben lowers another 25 bips it's all psychology for kids and morons (and a few bondtraders who will steal the zeal). The monetarist majic or the correct rate to effect the "correct" amount of money chasing the goods that come "onto" line is all propaganda.
If the Chinese and the Japs were forced to stop the manipulation of their respective currencies (Dr. Ben has this diagnosis by the way) then our economy would be playing by the rules of "free" enterprise. Why oh why is it that all these republicans can't get the orientals to play fair?
Why oh why is it that all these republicans can't get the orientals to play fair?
Simple; there is a benefit to the super-rich to this system. The 'orientals" keeping their money down, and us keeping our dollar high keeps the status quo of manufacture there, consumption here. A disruption in that dynamic would cost the industrialists money. One trend going on now that will disrupt the system is the price of energy, adding cost to imports and making domestic manufacture look more attractive.
The price of energy, especially oil, will definately have an impact, mcostello. Your simple answer is on the money (pun intended.)
The republicans are putting the final nail in the coffin for the working class. They will scorch the earth before they lose the elections this fall. They rant about "no new taxes", while delivering the cruelest tax upon the 90% of the populus with no assets: INFLATION.
The Republicans will hand this time bomb to the Dems and laugh all the way to the bank.
We need massive tax increases on personal wealth and a return to the policies of the 1950's and earlier ( FDR).
Oddly enough, inflation will help this blue-collar mechanic. Anyone who keep his or her job and has a fixed rate mortgage will find that a lower fraction of their real income will go to the mortgage minimum payment. I estimate that I'll cut off five years of house paymets if inflation reaches 5.5%. That's about double what it's been for the last 15 years.
Per the main point of the article, did you also calculate the expected increases in food, transportation and home energy costs?
That depends on if your income adjusts upward with inflation. If your income remains the same, the fraction of mortgage/real income will stay the same, but the spending power of your discretionary money will be drastically reduced, along with your standard of living.
You assume your pay increases will keep up with inflation. Probably not a good assumption for most of us. Good luck.
Stick to mechanics, your math is suspect.
Merhaba. Have you considered the rising cost of food, fuel and healthcare in your equation?
What about needing a new car at some point, or a roof for that house?
Run your numbers and I think that you will end up like the rest of us. With a big headache !
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