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Do We Have Inflation?

Posted By Barry Ritholtz On April 15, 2006 @ 7:40 am In Data Analysis,Federal Reserve,Inflation | Comments Disabled

Barron’s jumps on the "We Have Inflation" bandwagon this week, with two editorials acknowledging what Big Picture [1] readers have long known: Inflation, undermeasured by the BLS, is robust and widespread throughout the economy.

Mike Santoli (subbing for Alan Abelson) addresses [2] the subject in the front of the weekly:

"THE COST OF AMERICA’S PASTIMES KEEPS RISING. This is not just a reference to the persistent escalation of prices for Major League Baseball tickets this season, which are up 5.4% on average from 2005, a rate of increase well ahead of that reflected in government-sanctioned inflation data.

The trend in baseball tickets, incidentally, follows a broader pattern in today’s economy. Namely, the things that we need — gasoline, coal, health insurance, tickets for the Red Sox and Yankees — are high and getting more expensive, while things we could easily do without — a third flat-screen TV, another Chevy Tahoe to replace the one GM gave us in ’04, fast-food burgers, box seats to a Royals game — are relatively cheap or dropping in price.

No, other pastimes are feeling the cost squeeze as well. A Nascar race car gets around four to six miles per gallon, about the same as the Class A RVs that so many race fans pilot to follow the circuit around the country all summer. With gasoline prices at retail up 18% from a year earlier and climbing toward the $3-a-gallon level reached last fall, this is becoming an increasingly pricey hobby. Note, not coincidentally, that nationwide registrations of motor homes fell 26% in January from a year earlier.

Perhaps it’s only a matter of time before the rocketing prices of aluminum (up 40% since September to an 18-year high) and titanium (which quadrupled in price last year) make it much more expensive for weekend warriors on baseball fields and golf courses to buy a new weapon to swing.

Arguably the most broadly pursued pastime in the country that’s becoming pricier is borrowing money, specifically borrowing to buy houses. With the bearish turn in the Treasury market driving the 10-year note yield above 5% last week, near a four-year high, Freddie Mac’s benchmark 30-year fixed-mortgage rate rose to just below 6.5%." (emphasis added)

Weighing in from the paper’s end pages: Thomas Donlan (Do We Have Inflation? [3]), who admonishes investors to be "keenly aware of inflation, and of the various methods for calculating it." That means understanding the oddities and permutations that go into the perenial under-measurement of inflation:

"The mathematicians at the federal Bureau of Labor Statistics seemed to confirm the homeowners’ intuition: The index most used to measure the rise of consumer prices (Consumer Price Index for All Urban Consumers) was up 3.4% in 2005, and the price of shelter, whether rented or incorporated in the price of a home, was up 2.6%. The appreciation of homes as investment assets was over 20% in some places. But investment isn’t consumption, and so investment assets aren’t recognized in the CPI. The statisticians confirmed that homeowners were wealthier, but only by definition.

Even within the realm of consumer goods and services, prices often respond to supply and demand more strongly than to the price of money. Gasoline was another hot topic last year. The price was up 50% between September 2004 and September 2005. Since gasoline is a commodity that almost every American buys every week at a price that’s clearly advertised in front of every gas station, many Americans use it as a simple proxy for the cost of living. Such people had the feeling last year that inflation was rising fast."

We’ve discussed all too many times that CPI fails to adequately capture the perniciousness of rising prices as they are experienced by consumer and corporations alike. Donlan observes "Like it or not, we are stuck with measuring inflation by measuring
prices. But we must understand that the measurements are made with a
rubber yardstick."

Ironic. Just as inflation — and the absurdity of the CPI — is finally get the ink it deserves, the acceleration in inflation has begun cooling off.

Oh, we still have
inflation, only its not getting worse at a faster clip anymore.


Cheapening Luxuries [2]

Barron’s, April 17, 2006


Do We Have Inflation? [3]
Barron’s, April 17, 2006

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

URL to article: http://www.ritholtz.com/blog/2006/04/do-we-have-inflation/

URLs in this post:

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

[2] addresses: http://online.barrons.com/article/SB114506023545326674.html

[3] Do We Have Inflation?: http://online.barrons.com/article/SB114505995362126644.html

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