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The Street Get Inflation Exactly Backwards

Posted By Barry Ritholtz On February 6, 2006 @ 2:35 pm In Commodities,Employment,Inflation | Comments Disabled

One of the odder aspects of analyzing the economy and capital markets comes when you reach a significant disagreement with the mainstream view of things. This includes the punditocracy of economists and strategists, as well as the financial press itself. And while I am wrong so frequently that I have come to expect to
, I do manage to get something dead on every now and again.

There is a special kind of joy – not quite schadenfreude – reserved for those rare occasions when you are exactly right and everyone else is precisely wrong. That has been the case with Inflation [1]. I am
hard pressed to think of another item of such grave economic consequence that nearly
the entire street has precisely bass ackwards.

In 2001/02, the economy was essentially flat lined. Tax cuts hadn’t helped, spending down the surplus was of no avail, nor was the War in Afghanistan. It wasn’t until the Federal Reserve made a concerted effort to “Reflate” the economy by cranking up money supply and radically lowering rates that the economy started moving again.

The Fed was successful. As I wrote way back in December 2002 [2]: “In the present disinflationary environment, the spike in [gold] suggests that the Fed’s maneuvers have – finally – started to
gain traction. If their priming of the pump is sufficient to spike gold, the implication should also be that increased liquidity and credit should be
sufficient to initiate economic growth – and market gains.”

The prime risk from artificially reflating a post-crash economy is Inflation. “As ye sow, so shall ye reap:” And that is precisely what followed the Fed’s
planned reflation. With the exception of wages, prices for just about everything
else have risen
: Homes, Oil, Precious Metals, Food, Construction Materials, Natural Gas, Industrial Metals, Education, Transportation, Medical Care, Coal, Insurance, etc. Pretty much any good or service you can consumer costs more today than it did three months or three years ago.

Excepting, of course, real wages and income.

How has the Street managed to get this so wrong? Part of it is due to completely misunderstanding the reason to report core CPI ex-energy. As we have written (all too repeatedly [3]), removing a volatile component from a single month is sensible when an event gives
cause (i.e., hurricanes). But with the
overall trend for the CRB index
has been up for 51 consecutive months, the ongoing reporting of inflation ex-inflation is nothing short of sheer idiocy.

As to that 4.7% Unemployment Rate: it was only so much more NILF [4]: The BLS [5] reported in January that as the overall population grew, the “civilian labor force” itself got smaller. Its not that the  numerator is getting larger; rather, its that the denominator in the unemployment fraction is getting smaller: 4.7% (7,040 / 150,114 = 4.689%).

Wage pressure? Hardly – it’s nothing more than basic arithmetic.

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/02/the-street-get-inflation-exactly-backwards/

URLs in this post:

[1] Inflation: http://bigpicture.typepad.com/comments/inflation/index.html

[2] December 2002: http://bigpicture.typepad.com/comments/files/special_gold_focus_december_13_comments.doc

[3] all too repeatedly: http://www.google.com/search?hl=en&lr=&q=site%3Abigpicture.typepad.com+inflation+ex-inflation&btnG=Search

[4] NILF: http://www.google.com/search?hl=en&lr=&q=site%3Abigpicture.typepad.com+not+in+labor+force&btnG=Search

[5] BLS: http://www.bls.gov/news.release/empsit.nr0.htm

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