Thursday, August 18, 2011

Inflationistas Beware

When the PPI (wholesale prices index) report came out yesterday for the United States, it caught everyone off guard, because core PPI went up 4 tenths to 2.5% when it was expected to go up two tenths and headline PPI went up 2 tenths  to 7.2% when it was expected to be unchanged.  The increase in the core PPI was a jolt and prompted many of us to dig into the report and wait to see the CPI report today with every expectation it would exceed expectations of up 2 tenths for both CPI and core CPI.  Today, the CPI report showed headline CPI went up 5 tenths to 3.6% and core CPI went up the expected 2 tenths to 1.8%.

When looking at the PPI numbers, it should be remembered that PPI has been more volatile than CPI, although it has been trending  with CPI more closely recently.  The headline whole sale prices were up on tobacco, trucks, and pharmaceuticals.  Looking at crude prices were down for the third straight month declining 1.2 with commodities down, but core crude prices were up on copper and corn.  We have previously written about copper in relation to China as loan collateral and the slowing global growth should bring it down as well as corn being up temporarily on weather conditions and Japan.  Crude foods were down 8 tenths.  Finished goods were up 6 tenths on fresh fruit (which are in season), melons (in season), eggs, dairy, coffee, and beef and veal with crude down 9 tenths but processed up 7 tenths.  Intermediate prices for foods were up only one tenth on processed eggs and natural, imitation, and processed cheese.  The FED is more likely to look at intermediate prices for future trend.

Headline CPI was up on food at home, dairy, fruit, energy, gas, and apparel.  Core CPI was up on shelter and medical care.

It is apparent in the CPI prices that there is impact from past higher commodity and transportation prices which have since started to decline and this decline in commodity and transportation prices is not yet reflected in the current CPI.  When looking at CPI, it should be remembered that headline CPI is more subject to transitory volatility which does not stick.  Consequently, core CPI is a more effective tracking of inflation/deflation trends.  While this does not help the pain of a pocket book in a grocery store today, it is significant in having a more accurate macroeconomic perspective.  Core CPI went up the expected amount and, at 1.8% annualized, it is still below the FED 2% target for growth.

Growth remains the problem not inflation long term.

Still, it is historically relevant to realize that if the CPI figures were as calculated in the 1980s, it would be approximately 11%; if they were as calculated in the 1990s, it would be approximately 7%.

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