Here is a twist: We used to discuss how the Fed loved their core (ex food & energy) inflation measures. I termed that Inflation Ex-Inflation, and if you look around TBP, you will see lots of mentions of that measure.

Take a closer look at Energy, one of the biggest non-housing components. As noted this morning, Commodities have entered a Bear Market. Gas & Oil are not contributing much inflationary pressures. If anything, Energy costs now are acting as a drag on Inflation.

Call it Inflation Ex-Deflation (Do you want to guess what that means for the Fed’s love of the Core Inflation (ex food & energy)?

Consider the Federal Reserve inflation target of 2.0%. Jim Bianco notes that inflation is moderate at 1.73%. However, if you take a closer look at the chart below of core CPI — you will see a 2.3% on a year-over-year basis (blue line) and a heady 2.71% on a three-month annualized basis (red line).

Sum it up and it means inflation less energy is largely running above the Federal Reserve’s target.

Energy Now A Drag On Inflation

Click to enlarge:

Source: Bianco Research



More charts after the jump


A Look At Gas Prices

Source: Bianco Research

Category: Energy, Inflation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

23 Responses to “Inflation Ex-Deflation (this time, INCLUDING energy)”

  1. RW says:

    There’s lies, damned lies, and statistics.

    Most other measures of inflation are well below the 2% Fed target as Calculated Risk notes here and there are convincing arguments that the target itself is too low, particularly in the face of high unemployment and uber-low interest rates; i.e., it is bluntly not possible for the Fed to meet its mandate of ‘full’ employment under current inflation targeting policy.

  2. rktbrkr says:

    They will shift from discussing “core inflation’ to total inflation – just to get the big picture

  3. farfetched says:

    How many Fed governors do you think buy groceries? How many trader/investors? I do and I can tell you the Fed’s measure is delusional. Many of the food items I saw the last time I was in a Krogers (last week) were nearly double from a year ago.

  4. dead hobo says:

    Nice correlation between gas and the S&P since 2009. It’s almost as if the price of gas is tightly integrated with the price of equities. Since QE1 most notably. Also, it’s quite interesting how oil can fall from $110 to $79, about 39%, while demand for oil has changed only a little. Yet people still act as if they believe the lies about oil prices being tightly integrated with real economic activity. It makes Wall Street pros look really dumb when they parrot the financial innovators.

  5. Julia Chestnut says:

    What I find fascinating is that this isn’t exactly demand push inflation, now is it? We’ve seen a collapse in demand in some fairly large sectors. It damn sure isn’t wage pressure inflation. Hmmm . . . . . .what could be causing inflation to run way ahead of interest rates in a deflationary environment? Could it be, printing debasing the currency?

    I am concerned that the rocket scientists at the Fed are not getting the big picture. Any economic tool is like a prescription drug: it is only good against certain symptoms and it comes with a raft of side effects that need to not be worse than the ill you were trying to cure. Trying to use monetary policy to stimulate an economy when the public sector is forcing fiscal contraction like gangbusters is like abusing Adderall to keep yourself from falling asleep from all the Valium you are popping: not only are you not going to see a lot of positives, but you also are at risk of a heart attack. At what point does what they are doing, in the context in which they are doing it, become extremely destructive to the entire economic body?

  6. gordo365 says:

    Isn’t oil production largely controlled by a cartel? It would be interesting to see oil price changes charted against OPEC production decisions.

  7. theexpertisin says:

    To paraphrase, you’ll know inflation when you see it.

    A trip to the grocery does it for me.

  8. DeDude says:


    Normally the Fed and the government corporate to save the economy, so when the Fed’s “hammer” is the best tool the Fed use it, and when the governments “screw driver” is the best tool the government use that. Unfortunately we now have a house of teapartiers who would rather screw America to the wall that allow a recovery that could help Obama get reelected. Until the morons that elect house teapartiers wake up and get outraged that somebody would put their own political gains above the health of the country, the Fed is locked into fixin things themselves using the wrong tools. But I agree and do worry when we will reach the point where the side-effects of the Fed medicine will be worse that its effect on the disease.

  9. Woj says:

    @RW – Aside from the decision to exclude food and energy prices, inflation data also poorly accounts for housing ( due to the use of owners’ equivalent rent. This has been rising the past few years (supporting higher inflation) even as house prices fell off a cliff.

    Regardless of the bad data, the Fed has no real mechanism by which to affect unemployment and the dual mandates are always at odds with one another.

  10. sherparick says:

    This is a great blog in many ways, but when it comes to the inflation, I am reminded that BR, Peter, and most of the blog’s readers are members of the rentier class, and like the folks on the Fed Board, share the preoccupation and apprehension about inflation (which of of course is a “generalized” rise in the prices, including the price of labor) in the economy of that class. In 1931, to preserve the gold standard, the Fed raised interest rates in a depressed economy in reaction to the Credit-Anstaldt crisis and Britain’s abandonment of the gold standard. How did that work out?

    Many rentiers on this site and others are now reaching for the new panacea for this great balance sheet recession, that very same remedy used in 1931. Raise Short term interest rates!!! Give capital a safe and adequate return and all will be well!!! Just ignore all those debtors cutting back their purchases to pay off those debts by raising their interest cost!!!

    It will be another interesting controlled Keynsian experiment to invert the yield curve. We Keynsians predict that would cause a slow down in growth and create a strong risk of another recession. If we get an inverted yield curve (versus the not very healthy almost flat one we have now have), how not each of the last six recessions being preceded by such an inverted curve?

    Well folks recession, depression, who cares really if you are in the 1%. You rentiers do pretty well with deflation and it appears we are moving that way.

    A couple of technical speculations about the price rise over the last year. Owner equivalent rent makes up about 1/3d of core CPI. This one factor, rents, appears to have exaggerated the rise of inflation over the past year as demand has exceeded new supply in rental housing. This appears transitory phenomena, particularly if employment growth stalls.

    Grocery prices, have gone up some over the last two years, but now appear to be flattening and regressing. Overall, I spend about the same as I did three years ago when I substitute items that fall in price for things that go up. (Pork seems very cheap compared to beef right now.) Some things, with 7 billion people in the world are just going to get more expensive then others in relative terms (fish for instance), but that is not inflation.


    BR: Better go brush up on my Marx to fashion a response to your Rentier comments . . .

  11. Woj says:

    @rktbtkr – You may be right, but if the Fed maintains its focus on core then its increasingly unlikely we will see any QE until after the election (

  12. mathman says:

    And as Chong would say: “Yeah, man i dig – inflation’s a DRAG man!”

    To Julia: The rocket scientologists are using a different “picture” – they’re trying to save the (tbtf) BANKS, not the citizenry per se, and you’re correct in that they don’t get it (because this method isn’t working for the banks either – it’s just delaying the inevitable, as so many have pointed out).

  13. RW says:

    Those who are arguing for accelerating inflation need to provide numbers: If you claim “many” grocery items have doubled then show the stats: how many and which items (I haven’t noticed any significant AKA non-seasonal) YoY increases at the grocery store myself, more the reverse actually, but then I don’t shop at Krogers).

    One of the pleasures of reading TBP is that data on which a judgement is based is provided in addition to the logic of the conclusion: This provides transparency, opportunity for co-analysis and, potentially, disagreement with either data or logic …or, in this particular case, both data and logic; e.g., the Billion Prices Project of MIT is in agreement with core CPI, strongly supporting the contention that inflation is below 2% and not accelerating upward.

    *NB: I would love to see reliable data that inflation is accelerating because that would be an indicator Fed policy is finally getting some traction.

  14. klarike says:

    The Inflation index’s biggest component is Owners’ Equivalent Rent (what you could rent your primary residence for) and it’s been rising with the shift from buying to renting. The question is whether it accurately represents the cost of housing. In the last 4 years the amount I could rent my condo for has risen from $1900 to $2200 or about 16%. In the same period I have refinanced my mortgage twice and my monthly payment has drop from $2400 to $1975 or about 18%. If the BLS called and asked I would have to report an increase in my cost of housing eventhough it has really fallen. It seems to me that core inflation is being overstated by the housing component.

  15. Hurricaner says:

    Dead Hobo already mentioned this…but it’s pretty clear that in 2008, oil became another financial game to play in the casino, rather than a gauge of economic activity.

    It’s subject to the same “risk on” “risk off” idiocy as the rest of the market…yet people still claim that speculation is not driving oil prices much. In 2006 and 2007, we had pretty low gasoline prices, yet economic activity worldwide was pretty robust (you can debate the cause of that – e.g., housing bubble, but there was still lots of growth).

    BR – any chance you have a chart from the fabulous folks at The Chart Store showing oil prices and gasoline prices plotted together? Methinks that it becomes very apparent that gasoline prices MUCH MUCH faster than they fall in relation to moving oil prices, but would like to see a graph of that to determine if reality matches perception. I can sort of superimpose the two graphs above, but having the two together would be great.

  16. cognos says:

    Why not just focus this lens on HOUSING?

    So in the mid-2000s, call it 2005… the Fed measure prob missed some significant inflation due to rising house prices.

    Now we miss MASSIVE DEFLATION due to housing (imagine how much, when we factor financing).

    By many measure housing is now flat on 2000 prices, plus 1/2 the financing rates. This 40% of consumption basket. We have large REAL WEALTH… but a serious deflation problem. Deflation causes unemployment, banking/financing problems, and makes it very hard for debtors to pay their debts. Sound right?

    Common sense is better than some silly econ statistic.

    Roughly speaking, housing costs are 5x to 50x energy costs.

  17. Futuredome says:

    Yeah, I don’t know where some of these people shop for groceries, but they have done nothing but fall where I live. That simply aren’t high or impressive.

    The so called unadjusted inflation isn’t that impressive for yearly in the year. That will drop considerably as it does every year. Last year was running well over 3% at this point before going down.

    Actually the “rentier” was used well before Marx. Yes, when you raise nominal interest rates, you cause the debt out there to be more expensive to service. This destroys savings as the early 30′s showed. The economy then goes into a freefall destroying more savings except of that for the capital owners. Labor had enough by 1933 and was going to start siezing production. Little surprise FDR showed up and offerred a “New Deal”(aka the capital owners offerred a “New Deal”). While the rentier DuPonts created the ALL because they wanted to fight rather than “deal”. Eventually the DuPonts would create the John Birch Society and leave Neslon Rockafeller to run it.

  18. The USA contract crude price tracks within 5% of its fundamentals fair value and thus major price moves are easily predictable one and even two years ahead. FYI, the multi-quarter cumulative effect of high petroleum prices trimmed o.7% off GDP in May.

    Barrel Meter & Gas Pump charts:

  19. northendmatt says:

    I would say it means we should expect inflation to go down in the coming months, since energy is an input into, well, everything…

  20. bonzo says:

    the fact that there are arguments about the “true” inflation rate is itself an argument for setting the target at something like 4%. There is no empirical evidence and no theoretical reason (at least not by mainstream economists, I’m not interested in the crackpot Austrian goldbugs) why inflation under 5% is a problem. Lots of arguments against 20% inflation, though even 20% inflation, as long as it is constant–neither increasing nor decreasing–is a minor problem compared to even a whiff of deflation.

  21. bonzo says:

    And BTW, when I argue for 4% inflation, I’m doing so as a rentier. Even if I was 100% long bonds, I wouldn’t want deflation, because it is unsustainable. Any profits I might make on my bonds during a severe deflation could easily be lost during the revolution that would follow. 4% inflation would allow me to go 100% stocks with confidence. Yes, I might lose a little from taxes on 4% inflation (20% cap gains rate X 4% inflation = .8% wealth tax on realized cap gains) but I’d make that loss back up in the long run due to the risk premium. Right now, I can’t go 100% stocks because of deflation is still a danger. A rentier who prefers deflation and depression to moderate inflation and robust economic growth is a fool.

  22. DeDude says:

    One difference compared to the 30′ies is that a fair amount of people in the consumer class actually are dependent on income from small (50-300K) nest eggs. We know it is ALL about demand and, therefore, all about the consumer class. The indebted part of the consumer class will be hurt by increasing interest rates, but a lot of them are stuck in underwater houses that they can neither sell nor refinance. So their main debt is not sensitive to change in rates in either direction. I don’t know what the personal bankruptcy rules were back then vs. now, but it seems like a lot of consumer class families would be better of with a default and moving into smaller quarters that they can afford particularly in states where you can just hand the keys to the bank and walk away.

    I know that some consumer class people would be hurt and others would benefit from a small rate increase. I would love to see a study of exactly how much hurt and how much benefit would land where, if the rates were increased by 50 points.

  23. Frilton Miedman says:

    farfetched Says:
    June 22nd, 2012 at 12:36 pm
    “How many Fed governors do you think buy groceries? How many trader/investors? I do and I can tell you the Fed’s measure is delusional. Many of the food items I saw the last time I was in a Krogers (last week) were nearly double from a year ago.”

    This disconnect also explains the outrageously piss-poor fiscal, tax and regulatory policies favoring supply side at a time when consumer debt is in worse shape than government debt to GDP.

    For example, Paul Ryan has absolutely no clue how devastating his plan would be, or he simplifies the difficulties it presents to the majority of Americans.