Posts filed under “Fixed Income/Interest Rates”

CPI versus Core Inflation

Cpi_vs_core_inflationThis will be the last in our series on inflation for today (hopefully).

As we noted earlier, there is historical precedent for Central Bankers looking at CPI inflation with the inflation data backed out of it. 

A picture is worth a 1000 words, and the chart nearby is no exception. It explains the risk to those who ignore energy prices or other price increases. Focusing on the core data (ex- inflation) ultimately will lead you to miss the primary move in price rises and broader inflation.

As the chart shows, in 2002, CPI bottomed at exactly 1%. It moved nearly continuously up for the next 12 months. During the entire time of this rise in inflation, the so-called core rate was actually declining. The core rate hit was still falling, and kissed 1% in mid-2003 — some 18 months after the CPI did.

This shows you how while inflation was clearly on the upswing during that entire period, those people who focused on the core rate were recieving misleading signals about price pressures. Indeed, to them prices appeared to be going lower while they were actually going higher.

You couldn’t ask for a more perfect example of Inflation ex-inflation.

It was only in 2004 that the core rate began to tick higher, moving to 2% and then above. By then, it was quite late. Over the same period, CPI rose to 3 plus %.

Here’s the Ubiq-cerpt™ from Jesse’s WSJ column:

"The Fed yesterday raised short-term rates a quarter point for the 11th time in a row, to 3.75%. Some economists had hoped and (incorrectly) predicted the Fed would pause to see how Katrina’s effects played out. But when the Fed acted, it was clear that policy makers remain more concerned about inflation.

They still paid homage to its beloved "core" inflation measure, trilling that it has been "relatively low." The core measure excludes food and energy prices because they are prone to swings that are, typically, outsized and temporary. But the core is increasingly outmoded as energy prices have undergone a sustained and sharp rise. "I think the Fed has started to think of [energy prices] as more of a core development," says Lehman economist Ethan Harris.

It’s about time. But the Fed isn’t just combating inflation. Though it doesn’t say so directly, it’s also fighting the insatiable risk appetite that it spawned by the shock of easy money it used to get us out of the post-9/11 malaise."


Fed Faces a Post-Katrina Conundrum: Slowdown in Growth, Rise in Inflation
September 21, 2005; Page C1,,SB112727002671347063,00.html

Category: Economy, Fixed Income/Interest Rates

The History of Inflation ex-inflation

Category: Economy, Fixed Income/Interest Rates

Parsing the Fed

Category: Economy, Fixed Income/Interest Rates

Deficits and Interest rates

Category: Economy, Fixed Income/Interest Rates

Its Gold Jerry, Gold!

Category: Commodities, Economy, Fixed Income/Interest Rates

Except for Inflation, there’s no Inflation

So let me make sure I completely understand this: If we back out all of the inflationary data from the CPI, and PPI, there is, um, no inflation? 

Thanks for clarifying that.

While the Dismal Set — and the majority of CNBC guests — continue to spout such foolish nonsense, its nice to see that at least the WSJ wasn’t bamboozeled. Their online headline read:  Consumer Prices Climb 0.5%

"Gasoline prices shot up 8.3%, the biggest increase since February 2003.
Food prices, however, were unchanged for the first time in nine months.
Medical-care prices were unchanged after nearly 30 years of increases.
Housing prices grew more slowly in August, falling to a 0.2% rate from
0.4% in July. Automobile prices fell 0.5%, half the rate of decline
recorded in July."

You can see more from the dismal set below . . .

UPDATE I: September 16, 2005 10:54 am

Its the ultimate Hedonic adjustment:  Chart of the Day shows us graphically that without the items that are going up in price, there is hardly any inflation at all! 


UPDATE II: September 17, 2005 11:54 am

The first official chart from the weekend WSJ:


UPDATE III: September 24, 2005 2:54 pm

Here’s a round up of all our recent discussions on inflation

Consumer Prices Climb 0.5%
Katrina Helps Propel Jobless Claims
To Highest Level in Nearly 10 Years
WALL STREET JOURNAL, September 15, 2005 5:44 p.m.,,SB112678676740241720,00.html

Read More

Category: Economy, Fixed Income/Interest Rates

3 and 2 year yield curve inversion

Category: Economy, Fixed Income/Interest Rates

Sunday Nite Linkfest

Category: Economy, Fixed Income/Interest Rates, Investing, Psychology, Weblogs

Understanding the Inverted Yield Curve

Category: Economy, Fixed Income/Interest Rates, Psychology

Recession Predictor

Category: Commodities, Economy, Fixed Income/Interest Rates