There’s No Inflation — Except for Necessities

Barron’s Alan Abelson weighs in on one of of our regularly and favored subjects: There is no inflation, except for all those pesky things going up in price (a/k/a/ inflation ex-inflation):

THERE’S NO INFLATION — EXCEPT FOR SUCH NECESSITIES of daily sustenance as food, gasoline and The Wall Street Journal (which, in case you were too busy having a jolly time at the beach to notice when it was disclosed, next month will fetch $1.50 a copy rather than the current buck). But those are obviously exceptions that prove the point, for none constitutes a component of core inflation, so, in the larger economic scheme of things, how significant can any of them be?

Once again last week, confronted by a disquieting indication that inflation is alive and virulent — namely, that the producer-price index shot up 0.9% in May — the Émile Coué chorus in the Street rushed to reassure the investing masses by singing their anthem of everything gets better every day, citing the much more demure 0.2% rise in core producer prices as incontrovertible evidence. And, we’re pleased to say, the masses were sufficiently reassured to shrug off the downbeat data and send the market bounding ahead.

And, of course, fresh fuel for the bulls came the very next morning as that same Coué chorus — or should we more properly call them "core-ists" — seized on release of the consumer-price index as confirmation that all’s well on the inflation front. What better proof, they exulted, than the miserly 0.1% uptick in the CPI — once you take out pesky items like food and energy. As for the 0.7% rise in the CPI when food and energy are included, "pshaw," they scoffed, that’s just the "headline number"!

For the life of us, we must confess, we don’t quite understand why "headline" is a pejorative. Do those contemptuous of us benighted souls who award it more serious notice laugh and sneer when a banner headline in their daily proclaims, "War Is Declared" or "World’s Tallest Building Collapses" or "Mets Win"?

We’ve no objection, of course, to anything that makes people happy, even if it’s a patently ersatz invention of the Federal Reserve conceived in the ’70s when that august body was desperate to find a semantic antidote to the heaving inflation of the time. So at the behest of the then cantankerous chairman, Arthur Burns, it tossed out first energy and then food from the standard calculation of inflation. The result, lo and behold!, was "core inflation," which has served nicely over the years to dim the perception of inflation and buoy spirits on Wall Street, if not in the real world whose inhabitants have to cope best they can with rising prices. (Please don’t accuse us of being anti-semantic; our source is the redoubtable Steve Roach, who was one of the economic-spear carriers at the Fed back then.)

And we’re also aware that the price of certain commodities has plummeted. DRAM prices, as we noted some weeks back, have suffered a huge markdown. Moreover, the Journal reports that a gram of cocaine, which sold for around $200 barely a decade ago, can be bought these days for as little as $20 (which perhaps tells you more about the no-inflation crew’s recreational habits than the legitimacy of their overall analysis).

Bur for ordinary folks like us who don’t dabble in DRAMS or do coke, such instances of lower prices might as well be snippets of fluff. The stuff, essential and not so essential both, we must fork over our hard-earned dough to acquire has been getting inexorably more costly for quite a spell now. And to judge by the action in the commodities markets — wheat at an 11-year high, crude at a nine-month peak, etc. after sad etc. — we might as well grimace and bear it, and draw what solace we can from the knowledge that core inflation is so meek.

Not much more to add to that . . .

UPDATE June 16, 2007 9:22am

The NYT’s Floyd Norris weighs in on the same subject in a blog post: Inflation Soars — But Wall Steet Ignores It:

Share prices are soaring today, on the good news that the core
consumer price index was up just 0.1 percent in May. Economists are
ignoring the fact that the overall C.P.I was up 0.7 percent.

The core figure leaves out food and energy, and since that is the
rate the Federal Reserve watches, traders think there is little risk of
a Fed move to tighten. The theory is that food and energy numbers can
be volatile and thus misleading.

The trouble with only watching the core rate is that real people eat
and also use energy. And changes in those prices are important over
long periods of time.

Over the past three months, the total consumer price index has risen
at a high annual rate of 7 percent, while the core rate is advancing at
the small rate of 1.6 percent.

To be sure, three months is a short period. But four years is not.
Over that period, the overall CPI is up at an annual rate of 3.15
percent, a full percentage point more than the core rate. Food is up at
a 3.1 percent rate, a 13 year high for that measure. And energy costs
have risen at a 12.9 percent annual rate.

 

Norris also notes that recently, China was
a net seller ($941 million) of Treasury bonds. "One month does not make a trend, but if China is getting hesitant
about adding to its Treasury portfolio, interest rates could be headed
up even if the Fed does want to ignore the actual inflation rate."

 

I wonder if there is any correlation between our interest rates and that little factoid . . .

>

Source:
Perils of Going Public
ALAN ABELSON
UP AND DOWN WALL STREET 
Barron’s, June 18, 2007   
http://online.barrons.com/article/SB118137047234330191.html

Inflation Soars — But Wall Steet Ignores It
Floyd Norris
NYT, June 15, 2007,  11:39 am

http://norris.blogs.nytimes.com/?p=202#comment-769

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