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What’s Boiling Beneath the Surging Inflation?

Consumers are going to shell out more money for the same stuff, that’s for sure. Inflation as measured by the Consumer Price Index jumped 2.2% in September compared to a year ago, the Bureau of Labor Statistics reported this morning. All fingers pointed at energy costs: the index jumped 10.1% year-over-year. Within it, “motor fuel” prices (gasoline and diesel) jumped 19.2%.

Food prices rose 1.2% year-over-year, kept down by prices for “food at home” – the stuff you buy at the grocery store – which inched up only 0.4% year-over-year in part due to the price war currently tearing into the supermarket sector.

In the chart below of CPI, note the dreadful “Deflation Monster” – one of those rare and brief occasions in the US when the purchasing power of wages actually rose just a tiny bit on a year-over-year basis. It was caused by the energy bust. And it was “transitory”:

In the chart, note how CPI jumped 2.8% in February and then retreated through June. This retreat was brushed off as “transitory” by Fed Chair Janet Yellen and other Fed governors when they vowed to continue raising rates. She had specifically pointed out a few of those “transitory” factors. And they’re now turning around.

One of these factors that Yellen had pointed out was telephone services, which includes the monthly costs that consumers pay for their smartphones. Those costs plunged as a price war among wireless carriers had broken out in 2016. This summer, the price index for telephone services was down around 9% year-over-year. The wireless component plunged as much as 13%. But that consumer bonanza could not last.

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

About Those “Hedonic Adjustments” to Inflation: Ignoring the Systemic Decline in Quality, Utility, Durability and Service

October 11, 2017

About Those “Hedonic Adjustments” to Inflation: Ignoring the Systemic Decline in Quality, Utility, Durability and Service

The quality, durability, utility and enjoyment-of-use of our products and services has been plummeting for years.

One of the more mysterious aspects of the official inflation rate is the hedonic quality adjustments that the Bureau of Labor Statistics makes to the components of the Consumer Price Index (CPI).

The basic idea is that when innovations improve the utility (and pleasure derived from) a product, the price is adjusted to reflect this improvement.

So if television screens become larger, while the price per TV remains the same, the hedonic quality adjustment adjusts the price down when calculating the CPI.

In other words, since we’re getting more for our money–more quality, more features, more goodies, more pleasure–the price is adjusted down to reflect this. If a TV that cost $250 had a 19-inch screen in the old days, and now a $250 TV has a 27-inch screen, the price of TVs in the CPI is adjusted down to reflect this increase in what the consumer is getting for her $250.

So while a TV still costs $250 to the consumer, in terms of measuring inflation the TV is reckoned to cost (for example) $225, as the consumer is getting a larger screen for her $250.

In other words, the price of TVs declines when measuring for inflation, even if the retail price remains unchanged. This is how the official rate of inflation can be so low even as real-world costs keep rising.

If you read the above link, you’ll find the mathematical model used to reduce the price of products when calculating the CPI, i.e. the rate of inflation.

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

Be Careful What You Wish For: Inflation Is Much Higher Than Advertised

October 5, 2017

Be Careful What You Wish For: Inflation Is Much Higher Than Advertised

What the Federal Reserve is actually whining about is not low inflation–it’s that high inflation isn’t pushing wages higher like it’s supposed to.

It’s not exactly a secret that real-world inflation is a lot higher than the official rates–the Consumer Price Index (CPI) and Personal Consumption Expenditures PCE). As many observers have pointed out, there are two primary flaws in the official measures of inflation:

1. Big-ticket expenses such as rent, healthcare and higher education–expenses that run into the thousands or tens of thousands of dollars annually–are severely underweighted or mis-reported. While rents are soared, the CPI uses an arcane (and misleading) measure of housing costs: owners equivalent rent. Why not just measure actual rents paid and actual mortgages/property taxes/home insurance premiums paid?

Healthcare is 18% of GDP but only 8.5% of CPI. To those exposed to actual costs of healthcare, 8.5% of the CPI is a joke.

The same can be said of higher education: households paying tuition and other college costs are exposed to horrendously high rates of inflation, as illustrated in this chart:

Revealing the Real Rate of Inflation Would Crash the System (August 3, 2016)

The Burrito Index: Consumer Prices Have Soared 160% Since 2001 (August 1, 2016)

Inflation Isn’t Evenly Distributed: The Protected Are Fine, the Unprotected Are Impoverished Debt-Serfs (May 25, 2017)

Then there’s the hedonic adjustments that are made to reflect improvements in quality, features, safety, etc. So the price of computers is discounted to reflect the increase in memory, etc. compared to previous models. This is a can of worms, as anyone shopping for a new car or truck can attest: yes, the vehicles have more safety features, but the sticker price is much higher. Do we knock off $10,000 the “price” because of these additional features? Why should we, when consumers have to pony up $10,000 more than they did a decade ago?

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

August Consumer Prices Jump Most Since January Due To Soaring Energy, Shelter Costs

September 14, 2017

After disappointing (for The Fed’s inflationistas) producer prices growth yesterday, consumer prices jumped 0.4% MoM in August – the biggest spike since January. Gains were driven by soaring energy costs (offset by a big decline in vehicle prices).

Year over Year, CPI remains below The Fed’s mandat at +1.9% but that is hotter than expected and the highest since April..

As the breakdown shows, the gains were largely driven by rising energy and shelter costs (and note that vehicle prices are tumbling)

And in core inflation, the shelter index was the main contributor to the rise, increasing 0.5 percent, its largest increase since October 2005. The rent index increased 0.4 percent, and the index for owners’ equivalent rent rose 0.3 percent. The index for lodging away from home rose sharply, increasing 4.4 percent after decreasing 4.2 percent in July.

Rent Inflation+3.9% YoY
Shelter inflation +3.3% YoY

So great news – the cost to drive and to have a roof over your head just surged!

Does the Price of Oil Determine General Increases in the Prices of Goods and Services?

May 5, 2017

DOES THE PRICE OF OIL DETERMINE GENERAL INCREASES IN THE PRICES OF GOODS AND SERVICES?

A very good visual correlation between the yearly percentage change in the consumer price index (CPI) and the yearly percentage change in the price of oil seems to provide support to the popular thinking that future changes in price inflation in the US are likely to be set by the yearly growth rate in the price of oil (see chart).

But is it valid to suggest that a price of an important input such as oil is a key determinant of the prices of goods and services?

Now producers of goods and services set asking prices. It is also true that producers whilst setting prices take into account various production costs including the cost of energy.

Whether the asking price set by producers is going to be realised in the market place hinges on consumers’ acceptance of the price set. Consumers dictate whether the price set by producers is “right”.

On this Mises wrote,

The consumers patronize those shops in which they can buy what they want at the cheapest price. Their buying and their abstention from buying decides who should own and run the plants and the farms. They determine precisely what should be produced, in what quality, and in what quantities.[1]

If consumers don’t have the money to support the prices asked by producers then the prices asked cannot be realised.

What is a price? It is the rate of exchange between goods established in a transaction. The price, or the rate of exchange of one good in terms of another, is the amount of the other good divided by the amount of the first good.

In a money economy, price will be the amount of money divided by the first good. A price is the sum of money paid for a unit of a good.

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

Fed’s Policy of Price Stability Results in More Instability

April 25, 2017

FED’S POLICY OF PRICE STABILITY RESULTS IN MORE INSTABILITY

For most economists the key factor that sets the foundation for healthy economic fundamentals is a stable price level as depicted by the consumer price index.

According to this way of thinking, a stable price level doesn’t obscure the visibility of the relative changes in the prices of goods and services, and enables businesses to see clearly market signals that are conveyed by the relative changes in the prices of goods and services. Consequently, it is held, this leads to the efficient use of the economy’s scarce resources and hence results in better economic fundamentals.

For instance, let us say that a relative strengthening in people’s demand for potatoes versus tomatoes took place. This relative strengthening, it is held, is going to be depicted by the relative increase in the prices of potatoes versus tomatoes.

Now in a free market, businesses pay attention to consumer wishes as manifested by changes in the relative prices of goods and services. Failing to abide by consumer wishes will lead to the wrong production mix of goods and services and will lead to losses.

Hence in our case businesses, by paying attention to relative changes in prices, are likely to increase the production of potatoes versus tomatoes.

According to this way of thinking, if the price level is not stable, then the visibility of the relative price changes becomes blurred and consequently, businesses cannot ascertain the relative changes in the demand for goods and services and make correct production decisions.

This leads to a misallocation of resources and to the weakening of economic fundamentals. Unstable changes in the price level obscure changes in the relative prices of goods and services. Consequently, businesses will find it difficult to recognize a change in relative prices when the price level is unstable.

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

Loonie Tumbles After Canadian Inflation, Retail Sales Plunge

September 23, 2016

Loonie Tumbles After Canadian Inflation, Retail Sales Plunge

A slew of disappointing data out of Canada has sent the Loonie tumbling this morning (despite higher oil prices).

Canadian Retail Sales and Inflation data missed across the board…

Multi-year lows in CPI, Core CPI, and Retail Sales…

And the result is a tumbling Loonie as expectations of further rate cuts loom…

Charts: Bloomberg

Ed Butowsky: Calculating The True Cost of Living

March 21, 2016

Ed Butowsky: Calculating The True Cost of Living

Why it’s much higher than we’re told/sold

Over the past decade, we’ve been told that inflation has been tame — actually below the target the Federal Reserve would like to see. But if that’s true, then why does the average household find it harder and harder to get by?

The ugly reality is that the true annual cost of living is far outpacing the government’s reported inflation rate. By nearly 10x in many parts of the country.

This week, we welcome Ed Butowsky, developer of the Chapwood Index, to the program. His index is a ‘real world’ measure of how prices are increasing much faster than the wages of the 99% can afford:

In my business, I wanted to make sure that I was building portfolios that weren’t just efficient but got people the rate of return that they needed. I thought: My goodness, what I need to do is give people a list of everything they spend money on and have them track quarter by quarter exactly their increases, so I can do a better job as a financial advisor in determining what return I need to target.

I got a hold of a list of 50 major metropolitan areas and found people in every city and I gave them a job: I asked everybody to send me what items they spend their after-tax dollars on. I got about 4,000 different items. Then I took the 500 that most frequently appeared on the list and we’ve been tracking specifically these same items in every city since that period of time. I weight this list based on what percentage of a normal income people spend on each item.

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

Fruit and vegetable prices hike overall food costs

February 21, 2016

Fruit and vegetable prices hike overall food costs

Food prices increased by four per cent over the year, largely because of the low loonie

According to the Consumer Price Index, food prices increased by four per cent from Jan. 2015 to Jan. 2016. But fresh vegetables alone were up 18 per cent. For example, just in December, the price of tomatoes shot up by 30 per cent.

“Well, obviously the weak loonie has had an impact on produce and fruit prices,” said Sylvain Charlebois, professor of marketing and consumer studies at the University of Guelph Food Institute. “They’ve gone up significanty.”

According to the Consumer Price Index, released by Statistics Canada on Friday, food prices increased by four per cent in January 2016, compared to the same month a year earlier. But fresh vegetables were up 18 per cent over that period, while the price of tomatoes alone shot up 30 per cent from the previous month.

Lettuce was up nearly 18 per cent in January, compared to a year earlier, while other fresh vegetables, including broccoli, cauliflower, celery and peppers, registered their largest year-over-year increase since April 2009, rising 23 per cent over the previous year.

Fresh fruit was up nearly 13 per cent for the year, with apples rising 16.6 per cent and oranges 11.

‘Driven by the weakened currency’

“Clearly many importers had to procure some produce outside of North America and that really increases transportation costs,” Charlebois said. “Peppers — we’ve had to go to Europe to get some of those products — so that’s why some products have increased by more than 30 per cent in a month.”

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

Inflation in Canada ticks up to 1.6% in December on higher food prices

January 22, 2016

Inflation in Canada ticks up to 1.6% in December on higher food prices

Food prices are increasing at more than twice the overall inflation rate, Statistics Canada says. (Shutterstock )

Statistics Canada reported Friday that Canada’s inflation rate is now at its highest level in more than a year.

All eight subsectors the agency pays attention to in calculating the inflation rate went up during the month.

But food led the way, as Canadians paid 3.7 per cent more for food last month than they did in the same month a year earlier. That means food prices increased at more than twice the overall inflation rate.

CANADIAN INFLATION IN DECEMBER “Food prices were a source of upward pressure, amid the great cauliflower crisis,” BMO economist Doug Porter noted, referencing a popular internet meme of this year centred around exorbitant prices observed for the vegetable.

Fresh vegetables were indeed among the biggest factors in the higher inflation rate, up 13.3 per cent in December on an annualized basis.

The data agency’s transportation index, which includes gas prices, increased by 0.6 per cent after declining for each of the previous 13 months.

Overall, prices rose in every province and territory, but B.C. led with an inflation rate of 1.9 per cent.

Economists have been warning that the lower Canadian dollar would start to push up prices for imported items such as food and gasoline.

Earthquake Economics

January 16, 2016

Earthquake Economics

Beyond Human Capacity

“The United States of America, right now, has the strongest, most durable economy in the world,” said President Obama, in his State of the Union address, on Tuesday night. What performance metrics he based his assertion on is unclear. But we’ll give him the benefit of the doubt.

A collapsed building is seen in Concepcion , Chile, Thursday, March 4, 2010. An 8.8-magnitude earthquake struck central Chile early Saturday, causing widespread damage. (AP Photo/ Natacha Pisarenko) Photo credit: Natacha Pisarenko / AP

Maybe this is so…right now. But it isn’t eternal. For at grade, hidden in plain sight, a braid of positive and negative surface flowers indicate an economic strike-slip fault extends below. What’s more, the economy’s foundation dangerously straddles across it.

1-gdpnow-forecast-evolution Actually, it probably isn’t so – the Atlanta Fed’s GDP Now measure, which has proven surprisingly accurate thus far, indicates that the US economy is hanging by a thread – and the above chart does now yet include the string of horrendous economic data released since January 8.

Something must slip. A massive vertical rupture is coming that will collapse everything within a wide-ranging proximity. It is not a matter of if it will come. But, rather, of when…regardless of what the President says.

Here at the Economic Prism we have no reservations about the U.S. – or world – economy. We see absurdities and inconsistencies. We see instabilities perilously pyramided up, which could rapidly cascade down. We just don’t know when.

Comprehending and connecting the infinite nodes and relationships within an economy are beyond even the most intelligent human’s capacity. Cause and effect chains are not always immediately observable. Feedback loops are often circuitous and unpredictable. What is at any given moment may not be what it appears.

Not Without Consequences

For instance, the Federal Reserve quadrupled its balance sheet following the 2008 financial crisis, yet consumer prices hardly budged. Undeniably, the Bureau of Labor Statistics’ consumer price index is subject to gross manipulation. We’re not endorsing the veracity of the CPI.

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

I Sure Am Glad There’s No Inflation

August 5, 2015

I Sure Am Glad There’s No Inflation

I sure am glad there’s no inflation, because these “stable prices” the Federal Reserve keeps jaw-jacking about are putting us in a world of hurt.

We are constantly bombarded with two messages about inflation:

1. Inflation is near-zero

2. This worries the Federal Reserve terribly, because stable prices are deflationaryand deflation is (for reasons that are never explained) like the financial Black Plague that will wipe out humanity if it isn’t vanquished by a healthy dose of inflation (i.e. getting less for your money).

Those of us outside the inner circles of power are glad there’s no inflation, because we’d rather get more for our money (deflation) rather than less for our money (inflation). You know what I mean: the package that once held 16 ounces now only holds 13 ounces. A medication that once cost $79 now costs $79,000. (This is a much slighter exaggeration than you might imagine.)

Our excellent F-18 Super Hornet fighter aircraft cost us taxpayers $54 million a piece. Now the replacement fighter, the wallowing collection of defective parts flying in close proximity known as the F-35 costs $250 million each–unless you want an engine in it. That’ll cost you extra, partner.

Despite all these widely known examples of rampant inflation, every month we’re told there’s no inflation. Just to reassure myself there’s no inflation, I looked up a few charts on the St. Louis Fed’s FRED database.

I have to say, I’m scratching my head here because the cost of things has gone up a lot since 2000.

The consumer price index is up 38% from 2000. Now if somebody were to give me a choice between getting 10 gallons of gasoline and 10 gallons minus 3.8 gallons of gasoline, I’d take the 10 gallons. So how the heck can a 38% increase be near-zero inflation?

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

Inaccurate statistics and the threat to bonds

May 29, 2015

Inaccurate statistics and the threat to bonds

Statistics have become very misleading: in particular we are being badly misled into believing that the US is teetering on the edge of price deflation, because the US official rate of inflation is barely positive, a level that US bonds and therefore all other financial markets have priced in without accepting it is actually significantly higher.

There are two possible approaches to assessing the true rate of price inflation. You can either reverse all the tweaks government statisticians have implemented over the decades to reduce the apparent rate, or you can collect a statistically significant sample of price data independently and turn that into an index. John Williams of Shadowstats.com is well known for his work on the former approach, but until recently I was unaware that anyone was attempting the latter. That is until Simon Hunt of Simon Hunt Strategic Services drew my attention to the Chapwood Index, which deserves wider publicity.

This is from the website: “The Chapwood Index reflects the true cost-of-living increase in America. Updated and released twice a year, it reports the unadjusted actual cost and price fluctuation of the top 500 items on which Americans spend their after-tax dollars in the 50 largest cities in the nation.” It is, therefore, statistically significant, and it consistently shows price inflation to be much higher than that indicated by the Consumer Price Index (CPI).

The table below shows this difference since 2011, and how it affects real GDP.

Chapwood index

Sources: Chapwood Index, US Bureau of Labor Statistics and Bureau of Economic Analysis. Figures may not total due to rounding.

The Chapwood number in the table is the simple arithmetic average of the 50 cities. The year-in, year-out 10% inflation rate is notable. Furthermore, Chapwood shows cumulative inflation rate as shown by the CPI for the four years to be understated by 39.9%, and using Chapwood numbers in place of the GDP deflator, real GDP has slumped a cumulative total of 21.4% over the four years.

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

Today’s CPI Lesson: The Fed’s 2% Inflation Target Is Completely Stupid

May 24, 2015

Today’s CPI Lesson: The Fed’s 2% Inflation Target Is Completely Stupid

The madness of the Fed’s pending 81 month run of zero interest rates comes down to an inflation subterfuge that has no logical or empirical grounding in real world economics. Essentially, the Keynesians who currently inhabit the Eccles Building have turned all of central banking’s anti-inflation history on its head, saying, instead, that there is not enough of it to create optimum economic growth and wealth; and, besides, the CPI is running below the 2% target—so prolonging the free money gravy train can’t do much harm.

Every part of that proposition is dead wrong. To wit, free money does immense harm by fueling rampant carry trade speculation; there is zero evidence that 2% inflation results in any more growth than 1% or even 0% inflation; and, as an empirical matter, there is plenty of inflation in the US economy and has been during the entire past 15 years of rampant money printing designed to stimulate more growth.

Still, real final sales in the US economy have grown at only a 1.8% rate since the year 2000, or by just half of the 3.5% rate recorded for the prior 46 years. But that downshift is not in any way attributable to inflation missing the allegedly optimum 2% target. In fact, during the last 15 years the CPI has increased at an average rate of exactly 2.18%.

So where’s the beef or rather the allegedly missing beef? Well, the monetary high priests hold that the PCE deflator, not the CPI, is the correct measure of inflation because it takes better account of changing consumer preferences or weighting shifts in the market basket of what people buy. That is, it captures their shifting to chicken, tuna or spam when they can’t afford steak.

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

Think Different About Purchasing Power

May 1, 2015

Think Different About Purchasing Power

The Tip of the Iceberg

The dollar is always losing value. To measure the decline, people turn to the Consumer Price Index (CPI), or various alternative measures such as Shadow Stats or Billion Prices Project. They measure a basket of goods, and we can see how it changes every year.

However, companies are constantly cutting costs. If we see nominal – i.e. dollar – prices rising, it’s despite this relentless increase in efficiency.

Prices in perspective – click to enlarge.

This graphic illustrates the disparity (I credit Tom Selgas for a brilliant visualization, which I recreated from memory). CPI measures only the orange zone, the tip of the iceberg. Most people don’t see the gray zone, and that’s a result of the greatest sleight of hand ever.

We need an accurate way to measure monetary debasement. For example, in retirement planning it’s tempting to divide your net worth by the cost of consumer goods. This seems to show your purchasing power. For example, if you have $200,000 and the cost of groceries for a year is $20,000 then you can eat for ten years.

However, this approach is flawed. To see why, let’s briefly consider primitive times when there was no lending or banking. People had to set aside some of their income, to buy a durable good like salt or silver—hoarding. When they could no longer work, they sold a little bit every week to buy food—dishoarding. People accumulated wealth while working, and dissipated it in retirement.

Life got a lot better with the advent of lending, because interest enables people to live on the income generated by their savings. People no longer consumed their principal, worrying about outliving their savings.

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

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