Posts filed under “Energy”

ECB on Core Inflation

Wow, turns out we were pretty timely with our response this morning.

This morning, the ECB chief noted that the "risks to the outlook for growth are judged to lie on the
downside."

No surprise there. But what really caught my was what Jean-Claude Trichet, President of the ECB, had to say about "core" inflation:

"As regards price developments, according to Eurostat’s flash estimate, the
annual HICP inflation rate increased strongly to 2.1% in September 2007, from
1.7% in August. As we have already indicated on previous occasions, we are now
entering a period during which unfavourable effects from energy prices will have
a strong impact on annual HICP inflation rates. Owing mainly to such effects, as
a result of the marked decline in energy prices a year ago combined with the
recent substantial increase in oil prices, we expect the inflation rate to
remain significantly above 2% in the remaining months of 2007 and in early 2008
,
before moderating again. Largely as a consequence of capacity constraints and
relatively tight labour market conditions, inflation is expected to be around 2%
on average in 2008.

Risks to the outlook for price developments remain on the upside. They
continue to include the possibility of further increases in the prices of oil
and agricultural products
as well as additional increases in administered prices
and indirect taxes beyond those announced thus far. Taking into account the
existence of capacity constraints, the favourable momentum of real GDP growth
observed over the past few quarters and the positive signs from labour markets,
stronger than currently expected wage developments may occur, and an increase in
the pricing power in market segments with low competition could materialise.
Such developments would pose upward risks to price stability. It is therefore
crucial that all parties concerned meet their responsibilities."   (emphasis added)

In other words, the non-core inflation level is rising, its significant, and its a threat to price stability. Focus too much on the Core to your own economy’s detriment . . .


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UPDATE: October 4, 2007 5:10pm

Singer suggested posting this IMF White paper on the Core inflation rate.

The IMF describes the paper thusly:

This paper provides an overview of statistical measurement issues relating to alternative measures of core inflation, and the criteria for choosing among them. The approaches to measurement considered include exclusion-based methods, imputation methods, limited influence estimators, reweighting, and economic modeling. Criteria for judging which approach to use include credibility, control, deviations from a smoothed reference series, volatility, predictive ability, causality and cointegration tests, and correlation with money supply. Country practice can differ in how the approaches are implemented and how their appropriateness is assessed. There is little consistency in the results of country studies to readily suggest guidelines on accepted methods.

For those of you (especially on the prior post) who prefer a more formal or academic approach to critiquing inflation, have at it!

Download IMF_white_paper.pdf


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Source:
Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
ECB Press conference, Vienna, 4 October 2007
http://www.ecb.int/press/pressconf/2007/html/is071004.en.html

Category: Commodities, Economy, Energy, Federal Reserve, Inflation

Fear of a Dollar Collapse, part II

Yesterday, we discussed the potential impact of the ongoing weakening of the US dollar.

Today, we look at a few printing press Money Supply issues. Our focus: The spread between the Fed liquidity action (a/k/a Repos) and the M2 money supply measures.

This is simply a measure of how much cash the Fed is injecting into the system.

The following Bloomberg chart shows the spread between the two of these monetary measures. It is quite instructive:

Mzm_m2_spread

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Speaking of surges: As you can clearly see above (bottom left chart), the amount of MZM (repos) versus M2 during 2007 is enormous.

This means that the Fed is "inflating" at a rate faster today than it did right after 9/11, or during the deflationary scare of 2003.

As we asked Wednesday night, "What did the Fed Chair and the FOMC see that spooked them into a half point (over) reaction?"  I am not sure what is was (and we’ve discussed many of the potential issues over the past 2 years), but the Fed is obviously scared witless. 

The manifestations of this free  printing press are many: Any commodity priced in plentiful dollars will cost more. Crude is now $82; and Inflation Fears Send Gold to 27-Year High.

Why? One way to think about it is supply and demand. Print ALOT more dollars and each one is worth a little less. 

Or, consider it this way: Extracting Oil or Gold from the earth ain’t easy: We have to explore for Oil, determine where it is, how deep, what quality, etc. Then we have to use lots of heavy machinery to extract it, ship it to where it gets processed, refined, used in chemical manufacturing. Some of it gets refined into gasoline, and it is then transported to a network of gasoline stations, and it gets pumped into your car — all for less per gallon than diet Coke or peach Snapple!

For gold, the process is not all that dissimilar.

Just crank up the printing press: Its cheap and easy. But why should us gold and oil producers exchange our hard won commodities (its hard work) for pieces of paper you people are simply cranking out for free? Either give us something of real value — or instead, we will insist on more of your crappy ittle pieces of green paper.

Thus, the inflationary repercussions of a "free money" policy. In fact, every commodity that is priced in dollars can potentially see much higher prices:  Gold, Oil, Wheat, Soybeans, Copper, Timber, Corn, etc.

Its easy to understand why inflation has been called The Cruelest Tax.

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BTW, for those of you without a pricey Bloomberg terminal on their desks, a good source for (free) data of this kind is the Federal Reserve Bank of St. Louis’ publication, Monetary Trends. There are always a solid collection of charts showing money supply, economic conditions, etc. Not to get too wonky on you, but this is simply pornography for econ geeks.

There are a few charts after the jump worth reviewing. For the less visual of you, they show that Money Supply continues to grow at a rapid pace, that bank borrowings are increasing.

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Sources:
Monetary Trends
Federal Reserve Bank of St. Louis’
October 2007
http://research.stlouisfed.org/publications/mt/20071001/mtpub.pdf

Where Crude Goes Now May Depend on Dollar
Futures Close Near $82
MATT CHAMBERS
WSJ, September 20, 2007; Page C1
http://online.wsj.com/article/SB119019169756632291.html

Inflation Fears Send Gold to 27-Year High
Weakening Dollar Also an Influence; Metal Hits $732.40
ALLEN SYKORA
WSJ, September 21, 2007; Page C6
http://online.wsj.com/article/SB119028926640733763.html

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