Wednesday, July 15, 2009
Another Month, Another Big Price Spike, Another Seasonal Adjustment Downward
And the beat goes on. Two days after having a bunch of fair weather friends tell me, "Normally I love your stuff Bob, but Mish is right--we can't have inflation until the deleveraging is complete," the media tells us "Inflation Remains Tame" even though prices went up 0.7% from May to June. (Since when is an 8.7% annualized inflation rate "tame"??) Of course, the real number was 0.9%, and they seasonally adjusted away 20 bps. A few observations:
* Now the grace period is over. Every single month this year, the BLS has reported a lower inflation number than the actual increase in the CPI. Now that in and of itself isn't sinister, so long as they now overreport the numbers from July through December. (That's the whole rationale of seasonal adjustment, that prices tend to rise in the first half of the year, and so the BLS spreads it around more evenly among the months so as not to give a misleading impression in the early months when prices shoot up.) But since the desire is to keep inflation expectations low--among other things, it allows Bernanke to continue with his insane policies--I predict that they won't bump up the actual numbers in a symmetrical fashion in the coming months. Rather, they will revise the adjustments from the first half of this year, saying, "Oh, we actually did have real inflation back in the first two quarters. So now we'll book the price rises to those previous months, meaning that the price rise of 1.2 percent in September is real; we don't need to bump it up to a seasonally adjusted 1.6 percent hike."
* For those who don't know how to do exponentiation, the actual 0.9% price hike from May to June corresponds to an annualized price inflation rate of 11.4%. I'm not sure how that's possible, because everybody from Paul Krugman to the Austrians who email me, assures me you can't have inflation when there's "excess capacity" in the system. Why, just this morning even our beloved Robert Wenzel wrote in a post that hyperinflation and depression were on opposite ends of a spectrum. (I think it was a brief lapse for the great Wenzel; earlier he has been good by pointing out that Zimbabwe shows you can get big unemployment and big inflation at the same time.)
* Of course, you can't cherry pick a single month. Rather than looking at just what happened from May to June, let's go from Dec 08--when prices bottomed out--to June 09. That is half a year, kids, so surely that's a decent length of time for the trends to assert themselves. This is no mere blip. And during this six-month interval, when "right wingers" like Mankiw and left wingers like Krugman are telling us we need to fear a deflationary black hole, the actual, unadjusted CPI rose 2.6%, translating into an annualized price inflation rate of 5.3%. Can someone remind me what Bernanke's "comfort zone" is on inflation? I'm pretty sure 5.3% inflation is way way above it. At what point is he going to start sucking reserves out?
* For those who like pictures, try this:
So what's my explanation of the above? Simple. Because of the panic that began in September 2008, everybody wanted to hold more cash. Bernanke accommodated them by expanding M1 at double digit rates. However, the demand for cash outstripped even this huge growth in supply, and prices had to fall a few points to restore equilibrium. But this process ended back in December. Since then, we are back on the normal inflationary path. The kicker is, banks have an obscene amount of excess reserves. Once people besides me (and a few others who "don't get deleveraging") realize that our future portends INflation, not deflation, banks are going to get those reserves into something that yields more than 0.25% (or whatever rate Big Ben is paying them). And then you're going to wish you had more gold and silver coins under your bed.
* Last point: In fairness, the humongous 0.9% jump in prices last month was not across the board; it was focused in energy and a few other sectors. You can see the breakdown here. So someone pushing the Mishian approach could wriggle out of it, I suppose, and say that this is just due to blips in oil, and isn't representative of "the trend." Yet that picture above sure looks like a trend to me.
* Now the grace period is over. Every single month this year, the BLS has reported a lower inflation number than the actual increase in the CPI. Now that in and of itself isn't sinister, so long as they now overreport the numbers from July through December. (That's the whole rationale of seasonal adjustment, that prices tend to rise in the first half of the year, and so the BLS spreads it around more evenly among the months so as not to give a misleading impression in the early months when prices shoot up.) But since the desire is to keep inflation expectations low--among other things, it allows Bernanke to continue with his insane policies--I predict that they won't bump up the actual numbers in a symmetrical fashion in the coming months. Rather, they will revise the adjustments from the first half of this year, saying, "Oh, we actually did have real inflation back in the first two quarters. So now we'll book the price rises to those previous months, meaning that the price rise of 1.2 percent in September is real; we don't need to bump it up to a seasonally adjusted 1.6 percent hike."
* For those who don't know how to do exponentiation, the actual 0.9% price hike from May to June corresponds to an annualized price inflation rate of 11.4%. I'm not sure how that's possible, because everybody from Paul Krugman to the Austrians who email me, assures me you can't have inflation when there's "excess capacity" in the system. Why, just this morning even our beloved Robert Wenzel wrote in a post that hyperinflation and depression were on opposite ends of a spectrum. (I think it was a brief lapse for the great Wenzel; earlier he has been good by pointing out that Zimbabwe shows you can get big unemployment and big inflation at the same time.)
* Of course, you can't cherry pick a single month. Rather than looking at just what happened from May to June, let's go from Dec 08--when prices bottomed out--to June 09. That is half a year, kids, so surely that's a decent length of time for the trends to assert themselves. This is no mere blip. And during this six-month interval, when "right wingers" like Mankiw and left wingers like Krugman are telling us we need to fear a deflationary black hole, the actual, unadjusted CPI rose 2.6%, translating into an annualized price inflation rate of 5.3%. Can someone remind me what Bernanke's "comfort zone" is on inflation? I'm pretty sure 5.3% inflation is way way above it. At what point is he going to start sucking reserves out?
* For those who like pictures, try this:
So what's my explanation of the above? Simple. Because of the panic that began in September 2008, everybody wanted to hold more cash. Bernanke accommodated them by expanding M1 at double digit rates. However, the demand for cash outstripped even this huge growth in supply, and prices had to fall a few points to restore equilibrium. But this process ended back in December. Since then, we are back on the normal inflationary path. The kicker is, banks have an obscene amount of excess reserves. Once people besides me (and a few others who "don't get deleveraging") realize that our future portends INflation, not deflation, banks are going to get those reserves into something that yields more than 0.25% (or whatever rate Big Ben is paying them). And then you're going to wish you had more gold and silver coins under your bed.
* Last point: In fairness, the humongous 0.9% jump in prices last month was not across the board; it was focused in energy and a few other sectors. You can see the breakdown here. So someone pushing the Mishian approach could wriggle out of it, I suppose, and say that this is just due to blips in oil, and isn't representative of "the trend." Yet that picture above sure looks like a trend to me.
Comments:
After some serious naysaying, it looks like Bob's inflation party train is back at full steam!
John Williams at Shadowstats has the annual CPI even higher by around 3%.
John Williams at Shadowstats has the annual CPI even higher by around 3%.
Bob,
All the deflationists are looking at the year over year numbers, but remember that oil and all the other commodities peaked last July. It'll be interesting to see what they have to say in the second half when the comparisons don't show any deflation. I read Mish and he's been good on some things as has the guy over at Calculated Risk, but both of them (and Roubini among others) have gotten too full of themselves and married to their preferred outcome. They will miss the turn in economic activity (really just inflation induced but it will look like GDP growth) and inflation because they are married to the idea that spending is what causes inflation. The same is true of the capacity utilization guys (basically the entire Fed) who think that spare capacity means we can't have inflation. I can't believe anyone who lived through the seventies in the US (or observed any number of foriegn economies at various times) can believe such nonsense, but that is what passes for economic analysis these days.
The Fed's own research shows that the output gap is useless for predicting inflation. I did a post on this a while back: http://alhambrainvestments.com/blog/2009/06/22/inflation-3/
All the deflationists are looking at the year over year numbers, but remember that oil and all the other commodities peaked last July. It'll be interesting to see what they have to say in the second half when the comparisons don't show any deflation. I read Mish and he's been good on some things as has the guy over at Calculated Risk, but both of them (and Roubini among others) have gotten too full of themselves and married to their preferred outcome. They will miss the turn in economic activity (really just inflation induced but it will look like GDP growth) and inflation because they are married to the idea that spending is what causes inflation. The same is true of the capacity utilization guys (basically the entire Fed) who think that spare capacity means we can't have inflation. I can't believe anyone who lived through the seventies in the US (or observed any number of foriegn economies at various times) can believe such nonsense, but that is what passes for economic analysis these days.
The Fed's own research shows that the output gap is useless for predicting inflation. I did a post on this a while back: http://alhambrainvestments.com/blog/2009/06/22/inflation-3/
Bob, I think your criticism of seasonal adjustment is very unconvincing.
I make my argument here.
I'd love to hear your response.
I make my argument here.
I'd love to hear your response.
w/r/t "banks have an obscene amount of excess reserves"
Couldn't Ben just raise reserve ratio requirements as a way to keep inflation tame without having to sell off assets?
Couldn't Ben just raise reserve ratio requirements as a way to keep inflation tame without having to sell off assets?
# posted by 
: July 15, 2009 at 6:43 PM
: July 15, 2009 at 6:43 PM
Notal, your first point is true, but that's what I have been saying. In fact, in this very post I said in and of itself the s.a. isn't sinister.
Your second point is interesting, and I guess it depends on what time period we are using. I.e. the last six months of 2008 were supposed to compensate for the adjustments made in the first six months of 2008, but I see your point.
Well we only have to wait a month to see what happens. I am curious to see what they do if the raw numbers keep going up.
(Of course, they also will fudge the raw numbers, but I can't do too much about that.)
And good catch with the 20 bps mistake; I was just going off the rounded .9% --> .7%.
Your second point is interesting, and I guess it depends on what time period we are using. I.e. the last six months of 2008 were supposed to compensate for the adjustments made in the first six months of 2008, but I see your point.
Well we only have to wait a month to see what happens. I am curious to see what they do if the raw numbers keep going up.
(Of course, they also will fudge the raw numbers, but I can't do too much about that.)
And good catch with the 20 bps mistake; I was just going off the rounded .9% --> .7%.
Bob, can you tell me how you got 11.4% annualized inflation off of .9% monthly inflation? The way I thought it was done was simply .9% multiplied by 12 months should equal 10.8%.
# posted by : July 15, 2009 at 10:21 PM
: July 15, 2009 at 10:21 PM
Anon,
Multiplying the interest rate by 12 doesn't take into account the compounding effect of the interest, that is the interest paid on the interest from earlier months. To calculate the annualized interest rates you have to raise the monthly rate to the 12th power. That is 100.9%^12 (i.e. 1.009^12), or if you prefer: 1.009 x 1.009 x 1.009 x 1.009 x 1.009 x 1.009 x 1.009 x 1.009 x 1.009 x 1.009 x 1.009 x 1.009 = 1.114, or an interest rate of 11.4%.
Multiplying the interest rate by 12 doesn't take into account the compounding effect of the interest, that is the interest paid on the interest from earlier months. To calculate the annualized interest rates you have to raise the monthly rate to the 12th power. That is 100.9%^12 (i.e. 1.009^12), or if you prefer: 1.009 x 1.009 x 1.009 x 1.009 x 1.009 x 1.009 x 1.009 x 1.009 x 1.009 x 1.009 x 1.009 x 1.009 = 1.114, or an interest rate of 11.4%.
Why can't people realize that even if you have excess capacity, all the money won't magically shift there. People will still stay in a similar buying pattern, and thus areas where there isn't excess capacity should skyrocket first. Where do people tend to continue buying in a recession? Food and energy. Ohh and magically those aren't in the core cpi.
# posted by : July 15, 2009 at 11:32 PM
: July 15, 2009 at 11:32 PM
I can't read your articles because the Bernanke online ad blocks the window and I can't move it nor close it. Could you please resolve this, it's frustrating, sir! And I do appreciate your blog, I receive good advice and it's just fun to read.
Thanks! John
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Thanks! John
# posted by : July 16, 2009 at 7:05 AM
: July 16, 2009 at 7:05 AM Subscribe to Post Comments [Atom]
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