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September 30, 2007


Barry Ritholtz

Price increases in food and energy have been transitory and self-limiting ?


Over the past 5 years, we have heard this emphasis on the Core levels.

Over that same time period, Oil has risen from ~$15 to over $80 (Gee, that doesn't sound either transitory or self limiting); Food prices have risen nearly as much, with beef, Dairy and grains all up tremendously. (Milk and cheese have nearly doubled over the past 12 months).

Outside of the absurdist core, BLS has not done a very good job capturing the increases in Health care costs, Housing or Education.

Look, if you want to pull out one month as aberrational (i.e., Nat Gas post-Katrina) that's fine. But to ignore a multi year trend where "volatility" is essentially in one direction is to accept an analytical misdirection that only serves to obscure Reality.

Ever since the Fed dropped rates to 1%, the dollar's purchasing power has fallen, nearly every asset class denominated in dollars has soared, and Inflation has risen dramatically.

Except in the core. Inflation ex-inflation, prices are stable.

No thanks.


The government has a great deal of incentive to understate inflation - COLA adjustments to SS recipients and the government sector chief among them. If the Fed so desired, there are any number of smoothing techniques that can take into account a Katrina, a refinery fire, or an Exxon Valdez event.

So... I guess the real question is: Should monetary policy be set so as to protect a large number of poor, lower middle class, and fixed income people (whose food and energy useage consume a large portion of their income)?

Or should monetary policy be set to protect entities who are encouraged to access to the discount window?


Actually you both have a point - so what does the data tell us ? If you look back over the last couple/few decades the DeLong position is vindicated. Total CPI is very noisy but is transient and both converges on and swings around the core. However recently there's been a divergence between core and total - more interestingly if you look at it a couple of ways, say YOY% changes and changes since a beginning recent trends in both appear benign; at least up to this last report. However total CPI has sustained an increase significantly above core.
Rather than continue to verbally arm-wave you can see the charts here: http://tinyurl.com/327bdt.

There's another point to make when you look at the sustained charts - over the years PPI and CPI converge and move together w/o major differences. Looking at the sustained changes chart you can that PPI has grown increasingly above CPI for several years.

So the questions are: does the worldwide pressure on energy, and as it ripples thru to food, mean we're seeing a structural change ? Think so.
Does that mean that the dangers of inflation creeping back in are rising. Think so.
What does the faster rising inputs prices mean for profits and overall economic performance if it's not being passed on to the buyer ? This is left as an exercise for the student. Extra-credit for also exploring how China' shift from exporting deflation to exporting inflation will accelerate that process.


Oops sorry about that. Turns out tinyurl's expire quicker than I thought. Try
1. http://tinyurl.com/327bdt for first in-depth pass and
2. http://tinyurl.com/2anlj6 for some refresh and other sources.

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