As mentioned, the full column setting the record straight on inflation is up, titled The Unpleasant Truth About Inflation. Its in the free section of TheStreet.com
Regular readers of this blog will no doubt recognize most of the content in the article from prior discussions.
Here’s an excerpt:
"It is crucial for investors to have a realistic understanding of how robust inflation is. Doing so early reveals investment opportunities that those who focus on the core CPI have missed. In particular, oil, commodities and gold have been attractive investments overlooked by the "no inflation" crowd.
Now, as the Fed rate tightening cycle goes from being accommodative to neutral and beyond, the risk to domestic equity holders increases. I have been advising clients that as we come to the end of 2005, they should be getting increasingly defensive. In addition to owning gold, they should be looking to increase their exposure overseas.
Those who live in a synthetic reality — seasonally adjusted, hedonically altered — will confront the unpleasant reality of the real universe. Ignoring inflationary data in the CPI won’t make it go away. All that accomplishes is to shift the focus away from precisely where it should be: on the part of CPI that has been rapidly increasing in price.
Those who fail to grasp this will pay a heavy price for their self-imposed ignorance."
That about sums it up.
The Unpleasant Truth About Inflation
10/23/2005 10:27 AM EDT
"A specter from the past has been haunting the stock market lately, and,
as with most specters, the question is whether this one is mostly real
or mostly imaginary.
The specter is inflation, and until recently, many investors thought it
was dead and gone. Lately, if you believe the Federal Reserve, it isn’t
exactly ba-a-a-a-ck, but it is lurking. The Fed’s fear of inflation,
together with its clear intention to keep raising U.S. short-term
interest rates to keep inflation in check, is the main thing that has
prevented the much-awaited fourth-quarter stock rally from commencing . . .
A few weeks ago, I gave Professor James Hamilton grief over his 45 year chart of the 12 month change in CPI (1960 – 2005). The very long chart, IMHO, makes inflation look more modest versus its long history than say a 5 year chart would.
Indeed, the impact of any longer term charts is that they make major events look like ripples; You can barely see the 1987 crash on a long SPX chart, and even 9/11 is hard to spot on a 10 year Nasdaq chart.
Today’s WSJ also uses a long term chart — 35 years of CPI and Core CPI. It presents a case that the core underreports inflation. Note that even during the late 1970s peak of CPI, the Core rate tracked the overall index; In 1972-74, however, the Core lagged the CPI appreciably.
That lag is very analogous to the present BLS reporting, and in my opinion, why the Fed is fighting inflation so aggressively.
Note: I modified the WSJ chart, zooming in on the two periods:<spacer>
click for larger chart
Chart courtesy of WSJ
The entire article is worth reading; I have more excerpts, and the original chart, after the jump.
Specter of Inflation Haunts Dow
While Waiting for Fed’s Fears To Subside, Investors Pull Back, Imperiling an Anticipated Rally
THE WALL STREET JOURNAL, October 24, 2005
As I mentioned earlier, I really haven’t had time to think about what I want birthday-wise. But then I recalled I am still waiting for someone (anyone!) to find this (previously mentioned) August 13, 1979 Business Week magazine for me: click for larger graphic I am willing to pay a fair value for this. I…Read More
Category: Financial Press