CPI + Velocity = Trouble
by Rebecca Wilder
Beginning of the year economic blues in the US? I think so. Just looking over Spencer’s CPI post; here is an excerpt (the first paragraph):
The CPI report was encouraging. The total CPI rose 0.2% and the year over year increase is only 2.6%. Although real average hourly earnings fell, real weekly earnings were unchanged.
The core CPI actually fell for the first time since 1982, bring the year over year change in the core CPI to 1.6%. The 6 month SAAR for the core CPI is 0.8%. Despite all the worries about inflation the normal pattern is for the best cyclical reading on the core CPI to occur in the first year or two after a recession. If the economy follows the normal pattern, the core CPI should continue to moderate for another year or two.
My first thought is that I don’t think that this is encouraging at all; and I’m not alone. Core prices fell; these prices are typically very, very sticky. For example, shelter prices are biased upwards in their calculations, but have been declining or unchanged for every month since August 2009. I know that the output gap is not directly observed, except by proxy in the capacity utilization numbers or the unemployment rate; but it must be huge to do this to housing costs.
Look at it differently: the velocity of money improved in October and November of 2009…
… but then took a step back in December of 2009. If this trend continues, non-energy prices are sure to back down much further. There’s just no support for price action at this time – the Fed can’t pull back… it probably should be putting more in.
crossposted with Newsneconomics by Rebecca Wilder
Note on data: Macroeconomic Advisers now publishes a blog where they make available their calculated monthly GDP series (nominal and real) to the public (thank you).
“There’s just no support for price action at this time – the Fed can’t pull back… it probably should be putting more in.”
Yes, and how about the Treasury? Shouldn’t we be putting people to work?
The focus on core prices misses the point of an inflation metric — measuring the inflation in what people have to pay for every day. Since ‘core’ excludes a huge piece of what people and businesses do (drive cars/trucks, eat food, heat houses, purchase materials), the ‘core’ inflation metric actively omits reality.
With PPI up 4.6 and the CPI numbers we got recently — an accurate measure of inflation gives you something like 3-5% — and one must remember that’s a trailing number. We’ve got a series of reports through August that will show inflation. That’s the number that will drive the Fed’s tightening cycle. http://www.hedgeye.com
Sorry Enders, I am not seeing your “inflation” at all. The PPI and CPI are lagging indexes. In otherwords, if the cycle is changed, they are about ready to drop again along with the US economy.
Thank you.
It’s interesting stuff
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