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Investors Do Not See “Transitory” Inflation

May 4, 2021

Investors Do Not See “Transitory” Inflation

The Federal Reserve and European Central Bank repeat that the recent inflationary spike is “transitory”. The problem is that investors do not buy it.

Inflation is always a monetary phenomenon, and this time is not different. What central banks call transitory effects, and the impact of supply chains are not the real drivers of inflationary pressures. No one can deny certain supply shock impacts, but the correlation and extent of the increase in prices of agricultural and industrial commodities to five-year highs as well as the abrupt rise of non-replicable goods and services to decade-highs have monetary policy to blame.  Injecting trillions of liquidity makes more funds chase fewer goods and the rise in the real inflation perceived by citizens is much larger than the official CPI.

Take food prices. The United Nations Food Price Index is up 30% in the past five years and up 10% year-to-date (April 2021). The rise in food prices already caused protests all over the world in 2018 and it continues to reach new highs. The correlation in the price increase of most agricultural goods also shows that it is a monetary effect.

The same can be said about the Bloomberg Commodity Index which is also at five-year highs and up 15% year-to-date.

Yes, there have been some supply disruptions in a few commodities, but it is not widespread let alone the norm. If anything can be said is that the rise in agricultural and industrial commodities is happening despite the persistent overcapacity that many of these had already before the pandemic. We should also remember that one of the unintended consequences of massive monetary expansion is perpetuation of overcapacity. Excess capacity is refinanced and maintained even in crisis times…

…click on the above link to read the rest of the article…

Why Global Inflation Is About To Go Into Overdrive

April 27, 2021

Why Global Inflation Is About To Go Into Overdrive

If you think inflation is already blistering hot –  as most companies and survey respondents clearly do – and the worst case been largely priced in, with little inflationary upside left, think again.

As Bloomberg notes, last week saw the Bloomberg Agriculture Spot Index rise by the most in almost nine years, to extend the stellar rally seen since last August.

Due to the lag between ag costs and finished food prices, the latter are about to soar. And since food is a large component of CPI baskets in Asia, Bloomberg warns that “this large inflationary impulse in the region that houses more than half the world’s population should result in higher wage costs in the factory base of the world. As CPI and PPI rise in Asia, it will feed through globally in the months ahead.”

Think “Arab Spring” (which sparked a domino effect of revolutions in North Africa and the Middle East due to soaring food prices) only in Asia this time… and on steroids. And then read what Albert Edwards wrote in December when he explained why he is “Starting To Panic About Soaring Food Prices.”

Producer Prices Surge. Germany, China, other Countries Are Now Exporting Inflation, Adding to US Inflation Pressures

April 26, 2021

Producer Prices Surge. Germany, China, other Countries Are Now Exporting Inflation, Adding to US Inflation Pressures

Central banks still brush it off as just “temporary.”

Producer prices of German industrial products in March rose by 0.9% from February, after having risen by 0.7% in February from January, and after having spiked by 1.4% in January from December, the biggest month-to-month jump since 2008.

Compared to March last year, producer prices jumped by 3.7%, according to the German Federal Statistics Office (Destatis), the biggest year-over-year jump since November 2011. The surge began last fall, after sharp declines earlier in the year:

Part of what caused the 3.7% increase from March last year — but not the surge over the past few months — is the “base effect“, since in February and March last year the producer price index was declining, and the latest year-over-year results are measured from those low points.

But factory prices have been rising on a month by month basis for the seventh straight months — with large increases over the past three months. And that has nothing to do with the base effect.

Prices of intermediate goods jumped by 5.7% year over year in March, the fastest since July 2011, due mainly to sharp rises in the price of secondary raw material (47%) and prepared feed for farm animals (16%). There were also increases in durable consumer goods (1.4%) and energy (8%), which in large part were driven by a sharp increase in electricity prices (9.6%).

Producer prices are now rising fast in the major manufacturing economies.

In China input costs rose 4.4% in March from a year earlier up from a 1.7% increase in February. It was the sharpest rise since July 2018. As the world’s biggest exporter, China’s rising prices stoke inflation around the world.

…click on the above link to read the rest of the article…

Uh Oh: Consumer Price Inflation Heating Up Fast

April 20, 2021

Uh Oh: Consumer Price Inflation Heating Up Fast

Consumer Price Inflation Heating Up Fast

Anna Shvets

Back in September 2020, we reported on Fed Chairman Jerome Powell’s inability to see a “hidden” inflation offset in energy that camouflaged the rise in overall inflation.

That “hidden” inflation offset has now vanished, and inflation appears to be heating up quickly. Anyone can see it.

Robert Wenzel wrote that price inflation is coming in hot, and in his second update he put a spotlight on gas prices:

The gasoline index continued to increase, rising 9.1-percent in March. For the last 12-months gasoline prices are up by 22-percent.

That’s a pretty big difference. See for yourself! All you have to do is go to the gas station. Alternately, take a look at the AAA National Average Gas Prices chart:

AAA National Average Gas Prices chart April 16 2021

Data from AAA as of 4/16/2021

Here’s a quick summary of the CPI report:

The consumer price index rose 0.6% from the previous month but 2.6% from the same period a year ago. The year-over-year gain is the highest since August 2018 and was well above the 1.7% recorded in February. The index was projected to rise 0.5% on a monthly basis and 2.5% from March 2020, according to Dow Jones estimates. [emphasis added]

Only 0.5% inflation per month? That’s 6% per year. Retirement savers take note: at 6% annual inflation, today’s saved dollar loses about half its value in 10 years.

Over at TheStreet, Mike Shedlock says inflation is rampant and obvious. Why can’t the Fed see it? Wolf Richter shows how the inflation spike would be twice as bad if home prices and durable goods prices were properly measured.

Even Steve Hanke, a notable economist from Johns Hopkins, had something to say on Twitter about Federal Reserve Chairman Powell’s apparent inability to acknowledge the dramatic rise in inflation already taking shape:

You can also see the massive increase in energy price inflation for yourself thanks to the Bureau of Labor and Statistics:

…click on the above link to read the rest of the article…

Inflation, real interest rates revisited

April 17, 2021

Dollar’s Purchasing Power Drops Sharply to Record Low, But It’s a Lot Worse than CPI Shows

April 14, 2021

Dollar’s Purchasing Power Drops Sharply to Record Low, But It’s a Lot Worse than CPI Shows

If the homeownership component in CPI mirrors the Case-Shiller Home Price Index, CPI would jump 5.1%! Not to speak of new & used vehicle prices, which I nevertheless speak of.

The Consumer Price Index jumped 0.6% in March compared to February, the sharpest month-to-month jump since 2009, according to the Bureau of Labor Statistics today, and was up 2.6% from a year earlier, after the 1.7% rise in February.

The infamous Base Effect, which I discussed last week in anticipation of what is now coming, was responsible for part of it: CPI had dipped in March last year, which created a lower base for today’s year-over-year comparison. Over the 13 months since February last year, which eliminates the Base Effect, CPI rose 2.3%.

  • Prices of durable goods continued their upward surge, rising 3.7% from a year ago (purple line);
  • Prices of nondurable goods, which are largely food and energy, including gasoline, jumped 4.2% (green line);
  • Prices of services rose 1.8%. This is the biggie, accounting for two-thirds of overall CPI. It is dominated by a measure for homeownership costs, which ludicrously, as home prices are exploding, merely ticked up 2.0% from a year ago. More on that in a moment.

Consumer price inflation means loss of purchasing power of the consumer dollar, and thereby the loss of the purchasing power of labor denominated in dollars. And the purchasing power thus measured dropped 0.5% in March from February to a new record low, according to the BLS data. Given the insistence by the Fed on perma-inflation, the dollar’s purchasing power keeps dropping from record low to record low:

But wait, it’s a lot worse…

…click on the above link to read the rest of the article…

Producer Prices Blow Out

April 12, 2021

Producer Prices Blow Out

And companies have been reporting that they’re able to pass on those surging costs. So here we go with inflation.

Inflation that producers are experiencing is now blowing out. The surging input costs and the ability to pass on those higher input costs that have been reported by company executives as part of the services PMIs and manufacturing PMIs, and that owners of small businesses have told me about for months, have now solidly fired up the Producer Price Index for final demand, which in March jumped by 1.0% from February – double the rate that economists polled by Reuters had forecast – after having jumped 0.5% in February, and 1.3% in January. The PPI has now taken off, after hovering in fairly benign territory last year.

Compared to March last year, the PPI jumped by 4.2%, the sharpest year-over-year increase since 2011, according to the Bureau of Labor Statisticstoday. Note the surge over the past three months (data via YCharts):

The “Base Effect” that I discussed yesterday can be blamed for only a portion of the year-over-year increase. A big part of the base effect is going to come in April.

The PPI hit a high in January 2020 with an index value of 119.2. In February and March last year, it dropped 0.5% from the prior month, and in April it plunged 1.1% to an index value of 116.7, driven by the collapse in fuel prices. And that was it in terms of declines. It has been rising ever since (data via YCharts):

What might April look like? Today’s index value at 123.1 is already 5.5% higher than that of April last year. If the PPI rises 0.5% in April from today’s level, it would make for a 6% year-over-year increase, the highest since the index was started in November 2009. And this would include the full brunt of the base effect.

…click on the above link to read the rest of the article…

Wrong… Again

March 25, 2021

Wrong... Again

Wrong… Again

The Federal Reserve met last week and voted to keep interest rates unchanged. What a shock!

The Fed also gave an upbeat forecast of economic growth, predicting that the U.S. economy will grow 6.5% this year, its highest rate in nearly 40 years. Its December 2020 forecast projected 4.2% growth.

The Fed also expects that the economy could return to full employment next year and that inflation could hit 2.4% this year before declining again.

In effect, the central bank said they were willing to let the economy run “hot” and risk higher inflation in order to capture the benefits of stronger growth.

Zero rates are essentially a given as far as the eye can see. What about that growth forecast?

The Fed has one of the worst forecasting records of any financial institution in the world. My expectation is that growth is slowing now and will get worse as the year progresses.

I believe this will be especially true as the Biden administration policies of higher taxes, more regulation, and open borders that import cheap labor take effect.

Biden has also shut down new oil and gas exploration and wants to push a Green New Deal that will guarantee higher energy prices. Higher energy prices are a burden on the economy.

Little Cause for Optimism

Where’s the evidence that growth is slower than the Fed expects?

Inflation measures remain weak. The annual core consumer price inflation rate moved down from 1.7% in September 2020 to 1.3% in February 2021.

The overall consumer price inflation rate (including food and energy) rose modestly from 1.4% in September 2020 to 1.7% in February 2021.

On a year-over-year basis, the core personal consumption expenditures rate of increase (the Fed’s preferred index) moved from 1.4% in October 2020 to 1.5% in January 2021.

…click on the above link to read the rest of the article…

daily reckoning, james rickards, fed, us federal reserve, inflation, price inflation, cpi, consumer price inflation,

House Price Inflation in CPI is of Course Complete Baloney, but it Accounts for 1/4 of Total CPI

March 13, 2021

House Price Inflation in CPI is of Course Complete Baloney, but it Accounts for 1/4 of Total CPI

With actual house price inflation based on market data, overall CPI would have jumped by 3.7%. Lifting the cover on the deception to keep CPI low.

For most Americans, housing costs are the largest item in their budget, ranging from 30% to 60% of their total monthly spending. In its Consumer Price Index (CPI) for February, released yesterday, the Bureau of Labor Statistics reported that the costs of homeownership (which the BLS calls “Owner’s equivalent rent of residence”) have increased by just 2.0% from a year ago, and that rents (“rent of primary residence”) have increased by 2.0%. They’re the biggest items among the 211 items in the CPI basket and together account for about one-third of overall CPI. They play a huge role in CPI. So…

Rent inflation of 2.0% year-over-year on average across the US might be roughly on target, from what I can see in other rental data. But homeowner’s inflation of just 2.0%, given the skyrocketing home prices? Ludicrous. In its latest release, the Case-Shiller National Home Price index jumped by 10.4%.

This discrepancy between home price increases and the CPI for homeowners – which has for years contributed to understating the overall CPI – is depicted in the chart of the Case-Shiller National Home Price Index (red line) and the CPI for “owner’s equivalent rent of residence” (black line). I set the homeowners CPI at 100 for January 2000 to match the Case-Shiller index, which is set by default at 100 for January 2000. This allows you to see the progression of both indices on the same axis.

The thus corrected CPI increases by 3.7%.

The “owner’s equivalent rent of residence” accounts for 24.2% of CPI. If it had increased by 10.4%, in line with the Case-Shiller index, instead of 2.0%, the overall CPI would have increased by 2.03 percentage points more…

…click on the above link to read the rest of the article…

wolfstreet, wolf richter, cpi, consumer price inflation, house prices, inflation, statistical manipulation, statistics,

Rabobank: Inflation Is Being “Hidden” Because Belief In Our Whole Fantasy System Is Collapsing

March 11, 2021

Rabobank: Inflation Is Being “Hidden” Because Belief In Our Whole Fantasy System Is Collapsing

Because Orcs

“And as if in answer there came from far away another note. Horns, horns, horns, in dark Mindolluin’s sides they dimly echoed. Great horns of the north wildly blowing. Rohan had come at last.”

Today is going to be dominated by the market pricing in US fiscal stimulus for the nth time, unless we buy the rumor and sell the fact: and it’s rumors and facts I want to address. US CPI yesterday saw headline inflation in line with consensus at 0.4% m/m and rising from 1.3% to 1.7% y/y, but core inflation a tick lower at 0.1% m/m and so dipping to 1.3% y/y. On the back of that, and a moderate US 10-year auction, US equities rose (the S&P up 0.6%); US bond yields dipped, (10s down 6bp from their intraday peak to close at 1.52%); and USD wobbled.

The CPI release included a footnote stating:

“…data collection in February was affected by the temporary closing or limited operations of certain types of establishments. These factors resulted in an increase in the number of prices considered temporarily unavailable and imputed. While the CPI program attempted to collect as much data as possible, many indexes are based on smaller amounts of collected prices than usual, and a small number of indexes that are normally published were not published this month.”

Or, to put it differently, ‘We did our best, but made some of it up’.

This rightly worried some people: is inflation being ‘hidden’?…

…click on the above link to read the rest of the article…

 

Dollar’s Purchasing Power Drops to Record Low, Despite Aggressive “Hedonic Quality Adjustments”

February 11, 2021

Dollar’s Purchasing Power Drops to Record Low, Despite Aggressive “Hedonic Quality Adjustments”

Spiking prices for new and used vehicles under the microscope.

The “Purchasing Power of the Consumer Dollar” – part of the Bureau of Labor Statistics’ Consumer Price Index data released today – is the politically incorrect mirror image of inflation in consumer prices, as measured by the Consumer Price Index (CPI). By wanting to increase consumer price inflation, the Fed in effect wants to decrease the purchasing power of the consumer dollar, to where consumers have to pay more for the same thing. Thereby it wants to decrease the purchasing power of labor paid in those dollars.

And that purchasing power of the dollar in January dropped by 1.5% year-over-year to another record low:

Note how the purchasing power of the dollar recovered for a few months during the Financial Crisis, when consumers could actually buy a little more with the fruits of their labor. The Fed considered this condition a horror show.

Inflation in durable goods, non-durable goods, and services.

The overall CPI for urban consumers, the politically correct way of expressing the decline in the purchasing power of the dollar, rose 1.4% in January, compared to a year earlier.

Each product that is in the basket of consumer goods tracked by the CPI has its own specific CPI. And all these products fall into three categories: durable goods (black line), nondurable goods (green line), and services (red line), with services accounting for 60% of the overall CPI. Here they are, with discussions below:

The CPI for services (red line) – everything from rent to airfares – increased mostly between 2% and 3% year-over-year for the last decade, but dropped during the Pandemic as demand for services such as hotels, flights, and cruises collapsed. For example, in January, year-over-year, the CPI for:

  • Airline tickets: -21.3%
  • Hotels: -13.3%
  • Admission to sporting events: -21.4%.

…click on the above link to read the rest of the article…

 

BoE Keeps Policy Unchanged, Tells Banks To Start Preparing For Negative Rates “If Necessary” But Sees Spike In Inflation

February 4, 2021

BoE Keeps Policy Unchanged, Tells Banks To Start Preparing For Negative Rates “If Necessary” But Sees Spike In Inflation

The Bank of England kept its stimulus program unchanged on Thursday. The BoE maintained its Bank Rate at 0.1% and left the size of its total asset purchase programme at 895 billion pounds in a unanimous decision, as expected.

Growth and Inflation

On QE, the BOE said that “if needed, there was scope for the Bank of England to re-evaluate the existing technical parameters of the gilt purchase programme” but that is unlikely since the BOE’s growth forecast was far stronger than previously:

  • UK GDP is expected to have risen a little in 2020 Q4 to a level around 8% lower than in 2019 Q4.
  • This is materially stronger than expected in the November Report.
  • While the scale and breadth of the Covid restrictions in place at present mean that they are expected to affect activity more than those in 2020 Q4, their impact is not expected to be as severe as in 2020 Q2, during the United Kingdom’s first lockdown.
  • GDP is expected to fall by around 4% in 2021 Q1, in contrast to expectations of a rise in the November Report.
  • Global GDP growth slowed in 2020 Q4, as a rise in Covid cases and consequent restrictions to contain the spread of the virus weighed on economic activity. Since the MPC’s previous meeting, financial markets have remained resilient.

The BOE also said that CPI inflation was expected to rise quite sharply towards the 2% target in the spring, as the reduction in VAT for certain services comes to an end and given developments in energy prices. In the MPC’s central projection, conditioned on the market path for interest rates, CPI inflation is projected to be close to 2% over the second and third years of the forecast period.

…click on the above link to read the rest of the article…

Soaring Food & Energy Costs Spark Rebound In Producer Prices

June 11, 2020

Soaring Food & Energy Costs Spark Rebound In Producer Prices

Producer Prices rebounded MoM in May with headline Final Demand PPI rising 0.4% (against +0.1% exp) but it left PPI YoY still down 0.8%…

Source: Bloomberg

Some serious dispersion in the various sector’s price swings…

This rebound was driven by a record surge in food prices…

Source: Bloomberg

Two-thirds of the May increase in the index for final demand goods is attributable to a 40.4-percent jump in meat prices.

Source: Bloomberg

The indexes for gasoline, processed young chickens, light motor trucks, liquefied petroleum gas, and carbon steel scrap also moved higher.

Source: Bloomberg

Conversely, prices for chicken eggs fell 41.2 percent. The indexes for diesel fuel and for plastic resins and materials also decreased.

What will Jay Powell do now that average joe’s cost of living is soaring?

A Word About the Current Chaos in Prices and Inflation

May 13, 2020

A Word About the Current Chaos in Prices and Inflation

Some prices collapsed, others skyrocketed, and the Consumer Price Index went haywire. Here’s what I’m seeing beyond the near term — and it’s not “deflation.”

Amid soaring prices of meat, beverages, fruit, veggies, and other food at home, and surging costs of personal goods, medical care services, and household furnishings, and amid a collapse in prices of gasoline, car rentals, public transportation, car insurance, lodging away from home, and other things – amid these diametrically opposed price movements, the Consumer Price Index went, as expected, haywire today. And we’re going to look at some of those gyrations beyond it.

First, here’s what got buffeted around:

The overall Consumer Price Index fell 0.8% in April from March, the steepest one-month drop since December 2008, when the economy was going through peak-Financial-Crisis 1. This brought the increase over the past 12 months down to 0.3%, the lowest since October 2015 during the oil bust at the time.

The “core” CPI – CPI without the volatile food components and the extremely volatile energy components – dropped 0.5% from March to April but was still up 1.4% from a year ago.

But wait…

What if we take out the most chaotic and largely temporary price movements at both ends to get to what the undying loss of the purchasing power of the dollar might be? Because that’s what consumer price inflation is.

There is a consumer price index that is not buffeted around by the month-to-month collapse of some prices and surge in other prices; The Cleveland Fed’s “Median CPI,” which is based on the data from the CPI, removes the extremes at both ends since these extremes are often temporary and distort long-term inflation trends.

…click on the above link to read the rest of the article…

The Problem is Not Deflation, It’s Attempts to Prevent It

May 6, 2020

The Problem is Not Deflation, It’s Attempts to Prevent It

Let’s investigate the Fed’s effort to prevent price deflation.

Here’s a Tweet that caught my eye. 

Real Vision✔@RealVision · 

“We’re about to have deflation and the market hasn’t figure it out yet… when it does, the Fed is going to shit itself.” @hendry_hugh @raoulGMI
https://rvtv.io/3aWzxf4 

Embedded video

david moravec@davidmooravec

Problem with deflation is- Why buy anything if you know it will be cheaper in the future.

“Problem with deflation is- Why buy anything if you know it will be cheaper in the future.,” responded one person. 

Let’s investigate that question starting with a look at the CPI basket.

CPI Percentage Weights

CPI percentage weights

Why Buy Anything Questionnaire

Q: If consumers think the price of food will drop, will they stop eating?
Q: If consumers think the price of natural gas will drop, will they stop heating their homes? 
Q: If consumers think the price of gasoline will drop, will they stop driving?
Q: If consumers think the price of rent will drop, will they hold off renting until that happens?
Q: If consumers think the price of rent will rise, will they rent two apartments to take advantage?
Q: If consumers think the price of taxis will rise, will they take multiple taxi rides on advance?
Q: If people need an operation, will they hold off if they think prices might drop next month?
Q: If people need an operation, will they have two operations if they expect the price will go up?

All of the above questions represent inelastic items. Those constitute over 80% of the CPI.  Let’s hone in on the elastic portion with additional Q&A.

Questions for the Fed – Elastic Items

Q: If people think the price of coats will rise will they buy a second coat they do not need?

…click on the above link to read the rest of the article…

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