Tue 11 Sep 2007
Real Inflation STILL Out of Control
Posted by RichSlick under The Fed
[11] Comments
Yahoo Finance had this article on rising 6.1% this year and this just reinforces my notion that real inflation is totally out of control and likely to be made worse if the Fed lowers rates next week. I qualify this with the word real inflation because the skewed statistics released by various government agencies are so out of whack that they’re meaningless.
Years ago, inflation was measured against a basket of goods so that a person could understand how much the cost of something had gone up. For example, in 1990 a steak might have cost $1.23 /lb and in 1993 in might have been $1.50/lb but sometime during the Clinton administration, “substitution” was allowed which meant that if steak had gone up to $2.99/lb then the average family would “switch” from steak to hamburger so the inflation report was adjusted to reflect the cost of a lb of ground beef vs. cost of 1 lb steak. At some point, people might be expected to eat a can of dog food so the government can easily report that inflation is under control.
The madness doesn’t stop there though because inflation reports are broken down into even more meaningless subsets of inflation such as “core” inflation. What is “core” inflation?
According to Investopedia “Core” Inflation is,
A measure of inflation that excludes certain items which face volatile price movements. Core inflation eliminates products that can have temporary price shocks because these shocks can diverge from the overall trend of inflation and give a false measure of inflation.
The most often removed items from the report because of “volatility” are energy and food but it can be anything that makes inflation reports look bad and some things (like health insurance, medical expenses or college tuition) are never factored in!
The world is hoping for and cheering the Fed to lower interest rates and the Fed may finally cave in to such demands but if the rate is lowered it will have long term negative consequences for everyone. You may be happy to see stocks rally on Sept. 19th after a Fed rate cut announcement but you’ll be paying dearly for it every day you go shopping.
September 11th, 2007 at 6:27 pm
I agree on this all – and China is showing record inflation too!
Just blogged about that
I am perplexed this market seems to not care about anything other than a 25 basis point cut that wouldnt help anything (even if it WOULD help, which it won’t) until July 2008….
cripes
This CPI bugs me to no end – real people who need to send kids to college, pay for health care, buy minor things like FOOD, and GAS are not seeing 2% inflation or whatever the CPI flavor of the day is.
September 11th, 2007 at 6:29 pm
p.s. did you design your own website? looks great – wish I knew how to do this tech stuff
September 11th, 2007 at 6:48 pm
The site features a slightly modified connections-reloaded theme which is available for WordPress.
Nice site Tradermark.
September 11th, 2007 at 9:33 pm
recently the SF Bay Area news reported that food prices has gone up more than 8% since last year. It’s unbelievable that food, energy, and housing are not counted into the CPI. Those are the basic expenses of ANYONE.
September 12th, 2007 at 11:45 am
I’ve lived in the SF Bay Area the last year and I haven’t noticed a rise in food prices.
I agree that the reporting is fubar, but I’m not sure it makes sense to factor in college expenses. That’s something that doesn’t factor into everyone’s finances.
At the same time, many of the technology products have come down in price. With VOIP my phone is much cheaper than my parents. The PCjr my parents bought for me in 1984 was around $1500-2000. Today, you can get a much more powerful computer for probably around $199 (if you go Linux). Such a computer can help you pay bills online or correspond with friends reducing your need for postage. I think it’s just a different landscape and it’s impossible to really measure the costs of inflation for everyone without having a mess.
September 12th, 2007 at 12:57 pm
We don’t eat consumer electronics and that’s why the fudging is stupid. People eat a basic basket of goods: steaks, eggs, milk, orange juice, etc. and for the longest time this is what inflation measured now it doesn’t measure anything. Perhaps inflation should be readjusted to reflect the price of computers.
Gee…computers cost $3000 in 1993 and today they cost $300, inflation is down by 500% woohoo! Too bad I can’t eat!
September 12th, 2007 at 6:30 pm
RichSlick are you pretty html savvy or was the WordPress pretty easy to set up (and did you use .org or .com)? Their is a big difference between the 2 from what I read
As for CPI, I hate the arguement of “well electronics are way cheaper.” Yes I bought a DVD player in 2001 for $800, now its $29. Doesn’t mean a thing to inflation. A basket of goods that people “NEED” to live is different from the extras that people have confused as needs, when they are simply wants.
How about this – compare all the reoccuring subscriptions people have today versus 1995. No one had cell phones at that time, that is (ON AVERAGE) $60 more vs $0 a decade ago. New line item. How about Internet access? Yes one can say well its cheaper than it was in 2002, but its way up from where it was in 1995 right? Since almost no one had one. So a new line item. Our “life” in general is more expensive due to line items to live a ‘comfortable modern’ life vs what a ‘comfortable modern’ life was 15 years ago. And lets use items that are necessities. As you said, one cannot eat the DVD player. Or cell phone.
China has not yet learned how to lie about their inflation, its 6.5% – if they used US figures I am sure they could “make” it 2.4%. This is why people feel constant economic uncertainty – they realize what is happening each week. What % of their weekly budget is going to gas versus 3 years ago (yes I know inflation based its cheaper than 1980 but compared to 1995? Not so much), what % of their weekly budget is going to food versus 3 years ago, etc. This is why budgets are strained on top of health care. How many people were covered by health care in 1995 vs now? How many people are paying way more out of pocket as they are not covered at all? Or their premiums are increasing as corporate America offloads a higher share of insurance each year to employees. All ‘hidden’ costs…
September 13th, 2007 at 7:52 am
TraderMark,
It’s pretty easy to setup, just find a hosting company that supports wordpress and you can pick whatever theme you want. Most editing is simply typing.
There is a good list here
Most installs are a click of a button as are most changes.
Inflation is out of control are about to be made worse next week if the Fed lowers rates.
September 13th, 2007 at 9:49 am
I put a poll on my blog to see what people thought the Fed would do. They seem to be a lot more conservative than the ‘talking heads’ on CNBC who are now calling for 50 basis point cut.
Most are polling 25 basis point and then neutral stance (i.e. not more cuts in the future) and 2nd place is “no cut”. Interesting dichotomy.
I am wondering how the market will react to 0 basis points on feds fund, but 50 basis points on discount window… hmmm….
also today’s jobless claims and if tomorrows retail sales hold up — one could argue no cut… hmmm… market will have a fit.
September 13th, 2007 at 2:39 pm
Oil closed above $80 and stocks rally. This world doesn’t make sense any more. As for rate cuts, stocks will probably rally for a day or two then drop as the USD falls off the proverbial cliff.
September 13th, 2007 at 6:20 pm
Umm… I suppose it means we won’t have a slowdown because if we did oil would be faltering? I guess that discounts the fact that India and China use about 1/10th oil per capita we do, and if they just reach 1/3rd per capita usage we do oil will be $200?
Did you see how installment debt has fallen off a cliff the past few weeks but revolving debt has shown a quick spike. Hmm, stressed out consumer cannot tap house ATM – now he goes to the next step, the credit card. What happens when the credit card is maxxed out? When does this music stop? Hmmm…
Markets right at technical resistance but tomorrow and Monday are sort of white noise ahead of the Fed. The market likes to do what no one expects. Everyone now expects a rally into the meeting and then a sell off when the Fed dissapoints them.
So this would mean reality is either a sharp drop either tomorrow or Monday, or a sustained huge move up even through the Fed meeting – since the market rarely does what we all assume it will do! I try not to call the market – its just too random. That said, I guess everything is tidy and fixed and Ben riding in on his white horse Tuesday has solved everything
Easy as that (sarcasm!)