Thursday, February 18, 2010


Producer Prices Rise at 18.2% Annualized Rate in January, 4.6% year/year

Now that I've got your attention... Yes the BLS reports that after seasonal adjustment, the Producer Price Index for finished goods was up 1.4% just from December to January, which works out to an 18.2% annualized rate. From January 2009 to January 2010, the PPI was up 4.6%.

Remember, this is the period of no price pressures. The Fed will begin its exit strategy big-time once price inflation picks up.

CPI numbers come out Friday morning...

I don't think they will... I think they'll keep rates low longer than they should. If Bernanke thinks that Greenspan's efforts had nothing to do with our situation, he'll act like Greenspan would and react to bond prices sooner than he will to any inflation rate. They'll keep thinking that there is lots of slack in capacity utilization and that the lower personal incomes will keep prices down. For the next Fed chair, I'll vote for the blindfolded chimp with the dartboard.
Bernanke probalby will start slowly withdrawing, but i think he likes the 4.6% year to year, that's probably his target.
He likes the 4.6% year to year, but wait till it continues to climb.

The problem is Helicopter Ben will not raise the FFR until we are on the way out of this, which won't be for a while.
So, in 2009, businesses had to cut almost 2% to stay afloat because the wholesale cost increase was almost 2% above what they could sell the products for.

We are on pace, if the CPI increase is the same as it was in 2009 (fat chance of that), to make it so businesses would have to cut about 16% to sell stuff for about 2% more than they did in 2009.

A similar CPI increase in 2010 will certainly result in more private-sector unemployment since private-sector wages probably won't match the increase. Since wages are not going up, any increase in cosumer goods will most certainly result in more unemployment of private-sector jobs.

And if businesses had to cut 16% just to sell stuff at the same CPI increase as 2009, there surely would be less businesses and less output, because they would have to fail or downsize.

Because of the downsizing and failing businesses, there should be lesser supply resulting in higher prices for 2010, not taking in account the possibility of more money in circulation pushing up prices.

Am I correct in assuming that 2010 will likely see a substantial CPI increase over 2009, even if the money supply happens to shrink to a small degree?

Either way businesses are screwed. If they magically could cut 16% and save us from higher prices, they would, which won't happen. I think there'll be about 16% percent less business.

Would that mean 16% more unemployment?
They'll talk tough and act weak. They feel they have no choice and will err on the side of inflation. With the slack out there they feel the risk is still deflation. All this talk, and their moving up the discount rate 25 bp tonight, is an attempt to control inflation expectations without restricting credit in any way. The price indexes have been relatively tame (even with this last PPI and Import/Export prices: as with gold and certain spreads.

the major risk, I think, is that inflation expectations ratchet up w/o enough growth and savings start to come out of hibernation but move into the "wrong" places, rates move up and banks forced back into risky assets start to put $1 trillion in excess reserves to work. The fed will not be able to Rev REPO that money fast enough and will be forced to either shrink the balance sheet(driving mortgage spreads wider) or increase the rate of interest they pay on reserves...the latter creates a ton of new issues to worry about
Today's CPI numbers show the same trend, up 2.6% yoy.

Nice column in the Wash Times today, Bob.
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