Time Again for.........
Posted on 04/22/2011 10:04:07 AM PDT by Uncle Miltie
Day after day the American public is inundated with media stories about surging food and gas prices, but if they want the real inflation story, they should ask a bartender.
The rate of change in prices for a beer or cocktail at the local pub—a component of the Consumer Price Index—is actually decelerating from a year ago. In fact, the annual change in prices for data processing, recreation, lodging, medical services and tuition are all showing a downward trend, according to David Rosenberg’s analysis of the government’s CPI data.
With all the hubbub about $100 oil, surging food prices, along with the comparisons to the 1970s, Rosenberg, who is chief economist & strategist at Gluskin Sheff, is trying to make the point that the U.S. is now primarily a service economy, with these industries accounting for much of our employment and two-thirds of our spending.
“Service sector inflation is now running at historical lows of little more than one percent, and here we are about to enter the third year of a statistical economic recovery,” said Rosenberg, formerly the economist at Merrill Lynch where he made his name by going against the perma-bullish Wall Street crowd. “Service sector inflation used to be sticky, because this area of the economy years ago was dominated by unions, was protected by entry barriers, and did not face much in the way of competitive pressures.”
“The times have changed,” wrote Rosenberg in a note to clients Tuesday.
Oil prices topped $110 a barrel and wheat added to its more than 60 percent 12-month gain on Tuesday. But the economist knocks down the notion that higher prices for these commodities will spark inflation for the rest of the economy. He argues that if service providers try to pass through prices to cover these higher input costs, the consumer will just stop spending, leading to demand destruction and a deflationary recession.
“Commodity-based economies have a serious inflation problem because food and energy are so crucial to that smokestack, low-income model,” said Steve Cortes of Veracruz LLC. “But in a services-based economy like the U.S., many areas are outright deflating, like technology — and many more key areas churning sideways: professional services, brokerage of all kinds, hotels. Inflationary periods like the 1970s start with wage inflation, which is sorely missing from this recovery.”
Indeed, Rosenberg found there is an 88 percent correlation between wages and inflation —and wages today, adjusted for productivity gains, are declining on an annual basis. Don’t look for that to change any time soon with unemployment still above 8 percent. Maybe that’s why the Federal Reserve says it has a dual mandate of stable prices and full employment.
Meanwhile, Fed Chairman Ben Bernanke is taking big hits from economists, leaders of nations, and even other members of the central bank’s Open Market Committee, for keeping rates effectively negative through his ongoing purchases of Treasury securities, the infamous ‘QE2.’ They say this easy money is responsible for the spike in commodities, which overshadows the slack in services, housing, and wages, and will lead to out-of-control inflation.
But what Rosenberg and others are saying is that Bernanke is shooting blanks. The Fed may be printing money, but it’s not multiplying through the economy like it once did. That’s because banks are not using it to extend credit, said the economist. Also, our economy has generally become more resistant to the Fed’s reflation powers because of productivity gains from technology and globalization, the doves say.
“The money multiplier has been broken for quite some time, and recently it is going lower,” said Brian Kelly, of Brian Kelly Capital, citing money supply data that for every $1 pumped into the economy only 76 cents is being created. “In effect, monetary policy has been losing its potency for 30 years. What the Fed is doing now is stepping on the gas while the tires spin in the mud.”
To be sure, the overall CPI index released last week showed a 2.7 percent annual increase in March, the biggest jump since December 2009. Excluding food and energy, prices increased by 1.2 percent.
“The U.S. has never had deflation with rising money supply and stock prices,” said Joe Lavorgna, chief U.S. economist at Deutsche Bank. “In fact, last quarter the CPI rose over 5 percent, the PPI was up 13 percent, and inflation expectations were well above 3 percent. This is not the stuff of deflation.”
It seems the majority of economists and investors are in the Lavorgna camp and expect the Fed to ease off the pedal this year. Still, there are new factors that could swing the inflation vs. deflation argument back in Rosenberg’s favor, and Bernanke’s, for that matter.
Standard & Poor’s cut their outlook Monday on U.S. debt to negative. If the country is going to keep its triple-A rating and the low borrowing costs that come with it, Congress is going to be forced to do a mix of spending cuts and tax hikes, the agency said.
Rosenberg’s argument is not that far-fetched because “the U.S. recovery has been far more tepid than normally the case,” said Sean Egan, President of Egan-Jones Ratings, who changed their U.S. outlook to negative back in March. “And sovereign-crisis related austerity measures and tax increases are deflationary.”
For a more pointy headed intellectual tit for tat, see here:
http://www.freerepublic.com/focus/f-news/2705333/posts
Well, if most of my paycheck went to hotels, bars and the like, then I’d be fine. However, most of MY paycheck goes to Walmart, Kroger and Shell. Therefore, I DO hurt when inflation hits hard in just those “small” areas.
Really.
Tuition is going up across the board from what I have seen, for example. Likewise medical services.
I wonder if this is due to the fact that fewer people can afford to send their kids to college or go to the doctor than any real decrease in unit costs.
yes- inflation is at an all time low; anyone that’s recently filled up their car with gas or went to the grocery store will agree with this....just like unemployment is only 8.9%...
i really hope obozo and the rats use these as talking points....
You may be unemployed, can’t afford gas to get to a job interview, and grocery prices are going up but hey, beers cheap!
In fact, the annual change in prices for data processing, recreation, lodging, medical services and tuition are all showing a downward trend,
Too many people out of work that cannot afford to purchase unnecessary services,and in some cases necessary services.
How about some methodology? Is the author using declining medicare fee rates as proof that medical services are going down? Wouldn't be surprised.
Oh wait, leftist liars & eggheads don't have to produce methodology, facts and evidence for their claims.
Tuition and medical services have been increasing at rates well above the CPI for two decades now. They’ve never in that time slowed down.
And, since I like to point out economic history (as well as the bankrupt methodology of economists of all stripes), I’ll observe this:
There was a time during the Great Depression, a period of time which most all economists can agree was strongly deflationary, when commodity prices were rising rather strongly due to deliberate destruction of supply by the FDR administration.
It IS possible to have commodity inflation while the money supply is collapsing. There’s quite a lot of economic theory which is simply twaddle and bunkum, and one of these things is the definition of inflation. For example, the monetarists would like to define inflation only in terms of the money supply. OK, well, in that case, we’re having inflation. Buuuuuttt.... there’s one little fly in the ointment: there’s still a huge supply of debt on bank balance sheets the world ‘round that is marginal to non-performing, and if we really held bankers to actual, you know, accounting standards, we’d see that the money supply might not be growing, it might be shrinking as we declared huge amounts of debt to be bad and in default. It isn’t just US mortgages I’m talking about - I’m also talking about things like Greek sovereign debt, other corporate debt, etc.
We’ll, when gas prices go up I start to eliminate things like bars and restaurants, travel, etc. to compensate for it.
1. Take some statistic that's increasing and for which it's a bad thing, like the budget, the defecit, CPI, etc.
2. So it's increasing and that's bad news. Now, observe its rate of change. If that's negative, pimp that as good news.
3. But maybe the rate of change his holding steady, or maybe it's even positive. So, take the rate of change of the rate of change, and maybe that's negative or steady. If so, that's the good news you can spout.
4. Unfortunately, when the increase is exponential, all rates of change are positive. Not to despair, however. Simply redefine (read: make up) the data series that you started with, and brag about how it's not increasing in the first place.
One reason the money multiplier has little effect (inflation) in the United States is because people like me, when we have an extra dollar laying around, move it out of the country. We do not believe that Fiscal, Monetary, or Economic policy of the Federal Government will help the U.S. So I invest in Foreign stocks, bonds, commodities, etc.
The Inflation associated with excess money supply therefore shows up in Chinese housing bubbles, world-wide gold and oil prices, food prices (world-wide commodities), Emerging Markets’ stock prices, etc.
The U.S. would (in my opinion) be suffering massive inflation, except that people like me help export inflation elsewhere. We run in fear of our government.
“Commodity-based economies have a serious inflation problem because food and energy are so crucial to that smokestack, low-income model,” said Steve Cortes of Veracruz LLC. “But in a services-based economy like the U.S., many areas are outright deflating, like technology — and many more key areas churning sideways: professional services, brokerage of all kinds, hotels. Inflationary periods like the 1970s start with wage inflation, which is sorely missing from this recovery.”
Technology is always a wild card because the CPI tracks the relative increase in value of technology as deflationary - a better computer costing the same as last year's means deflation.
Whereas in services such as hotels and brokerages, I think it is just plain demand destruction that is holding down costs.
I cannot make any sense of anything this article states. Why is that?
What is going on is biflation. Everything you need to survive is going up (food, clothing, oil). Every asset you have is deflating (house, value of money money, wages).
In short it is screwflation, as in you are screwed no matter what.
Guess I’ll have to start substituting liquor for bread, eggs, milk, cheese......
/s
My wife always figures that if she can't make sense of what they are saying, odds are they are bs'ing.
She's usually right.
Hope. Change. Cirrhosis.
hurt not the oil and the wine
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