Friendly Monthly (Price) Inflation Update
Relying on the official BLS reports that came out yesterday and today on the Producer Price Index (PPI) and Consumer Price Index (CPI) respectively, here are the price increases for various categories over the course of the year from September 2010 through September 2011:
Consumer Prices not counting food and energy: +2.0%
Consumer Prices, all items: +3.9%
Finished Goods, +6.9%
Intermediate Goods, +10.5%
Crude Goods, +20.9%
I have two observations:
==> The people telling us not to worry about (price) inflation–I have in mind Paul Krugman and Scott Sumner, but I’m sure others have said as much–tried to dismiss the bump up in “headline inflation” (meaning CPI all items) a while ago, by saying it was a one-shot spike due to the return of commodity prices to normal levels, following the slump when the panic set in. Exactly how long will it take us to get over that “hump”? Does it make sense that headline CPI is up 3.9% over the last twelve months, if this is all just a misleading spike due to oil price rises in 2009?
==> Since 2009, we have been lectured by the monetary experts that of the items above, the only thing we should pay attention to is the top number. All others are misleading for our simple hard-money minds, and will confuse us into worrying about the purchasing power of the dollar.
OK fine. The Fed’s stated policy goal, in terms of their “dual mandate,” is to keep “core CPI” (meaning CPI without food and energy) in the range of 1% – 2%. So now we are officially at the top of that range (we were there last month too), not to mention every other price category being in disconcerting territory. Are the people who, for the last three years, have ignored every other price index except core CPI, now going to agree that the Fed should tighten?
Don’t forget that M2 is increasing at over 20% (sorry, can’t remember the last release, I think it was 23.3% or thereabouts). Price inflation always has a lag, so I can only imagine what the next few months will bring. Wenzel seems to think that we are heading for another artificial boom, and I agree with him to a point. I just am not so confident that the boom will really get up and going. Sure, I can see indicators like inflation, asset prices, investment, etc showing those signs, but I don’t think that will translate into any sort of general feeling of prosperity.
“Are the people who, for the last three years, have ignored every other price index except core CPI, now going to agree that the Fed should tighten?”
Bias influences people. Bias influences smart people in devastating ways. Very smart people can relentlessly justify an opinion, especially in a “soft” science like economics, indefinitely. Based on the exchanges with the commentators here I would say there is almost no chance any of those you have been arguing with, are simply going to agree with you now. I’m not sure there is any situation in which they would. I know your other post with Sumner on inflation etc. certainly indicates that to be the case.
You do see this right?
“OK fine. The Fed’s stated policy goal, in terms of their “dual mandate,” is to keep “core CPI” (meaning CPI without food and energy) in the range of 1% – 2%. ”
The Fed is actually known to use core PCE, which is still 1.6%.
“Are the people who, for the last three years, have ignored every other price index except core CPI, now going to agree that the Fed should tighten?”
Those people favor a level target or a higher inflation target to make up for the low inflation from the the previous years.
> Those people favor a level target or a higher inflation target to make up for the low inflation from the the previous years.
You say this as though inflation is an end rather than a means.
Why yes, he does talk like Scott_Sumner, Paul Krugman, and pretty much every “major” economist.
Are the people who, for the last three years, have ignored every other price index except core CPI, now going to agree that the Fed should tighten?
NOT WHEN WE’RE IN A LIQUIDITY TRAP! ALL BETS ARE OFF!
uh….D’oh!
I really mean THE GOVERNMENT SHOULD PRINT…no that still doesn’t make any sense. I know! The government should tax and spend! Wait..no that won’t work either, because taxing takes money out and spending it just puts it right back in. They should borrow and spend more! Yeah! No, that won’t do it either because borrowing takes money out and spending it just puts it back in.
How about…violating our original promise and call for 5% inflation! Yippee! We have a winner!
Whew. Being a Keynesian is not easy let me tell you.
On inflation, Krugman has now gone on record for a test of his theories:
“Obviously there’s a test here. If people like Adam Posen and yours truly are right, UK inflation will fall off sharply in the near future. If it doesn’t, Adam says he’ll resign from the Monetary Policy Committee; and I’ll certainly have to make a major rethink.” (http://krugman.blogs.nytimes.com/2011/10/19/money-and-inflation-british-edition/)
Assuming you don’t mind the term “near future”.
Speaking of “worrying about the purchasing power of the dollar”, looking at this chart http://www.economist.com/blogs/freeexchange/2011/10/resource-prices shows that after the creation of the Fed (ok ok after WWI, but wartime inflation and the Fed just getting going are my excuses!) commodity prices have been declining while being pretty stable before then. Seems like the era of the central bank has been pretty good?
Yosef wrote:
Speaking of “worrying about the purchasing power of the dollar”, looking at this chart http://www.economist.com/blogs/freeexchange/2011/10/resource-prices shows that after the creation of the Fed (ok ok after WWI, but wartime inflation and the Fed just getting going are my excuses!) commodity prices have been declining while being pretty stable before then. Seems like the era of the central bank has been pretty good?
Look at the graph again, Yosef. They have been declining “in real terms,” and if you look at the footnote, it is adjusted by US GDP deflator. In other words, commodity prices haven’t been rising as fast as other prices, since WW1.
But of course commodity prices are much higher now than they were in 1913.
Sorry, I had thought I wrote real prices, I did see that in graph.
My point was that in the era of the central bank, people have had to exchange fewer goods and services (such as labor) for the purchase of commodities, whereas before hand the amount was pretty stable. This similar to the observation that the amount of labor hours required to earn things has also declined during the era of the central bank. Since it is the real prices that matter, the period post Fed has been better than pre-Fed.
Yosef, I think I’m right when I say the same approach would show “real” consumer prices falling pre-Fed and zooming up afterwards. So then we would say the Fed is doing a bad job, right?
I am saying there are two important comparisons: compare commodity prices to other prices in general (the chart so far), and compare general prices to labor worked (since in the end thats what we really care about, how well off people are for their work). The first chart shows the commodities have been getting cheaper compared to other goods. I have seen previously that the prices of goods when compared to labor have been declining. For example http://cafehayek.com/2006/01/working_for_sea.html (granted this is only going back to 1975, but I would argue that you would see a similar trend going back to the creation of the Fed, and before that a more stable relation between prices and labor).
If the prices of consumer goods were falling in relation to labor before the Fed and then shot up afterwards, then yes I would say the Fed is doing a bad job since it would wash out, or even overwhelm, the commodity decline.
Yosef wrote:
(granted this is only going back to 1975, but I would argue that you would see a similar trend going back to the creation of the Fed, and before that a more stable relation between prices and labor).
I would be very surprised to see that. I’m not betting my life on it, but I’d be surprised.
Yeah right, guys like Sumner and Krugman want core inflation closer to 4 or 5%. Anyone who doesn’t is a hearltess profiteer on the misery of others. Actually, Sumner doesn’t believe in inflation. It’s just a funny number cooked up by the government. I’m not joking, he actually said that to me in the comments section.
Is it normal to see inflation rates lowest at the consumer end (CPI) and increasing the further up the production chain you go, reaching a peak at crude goods? That’s what it seems to be every time I see the numbers reported, at least the last few years. But that’s not sustainable, and we should see the reverse just as much, right?
Is there some known measuring artifact that accounts for this? My suspicion is to say that producer prices/crude goods are where quality is easiest to measure, and thus where products are hardest to debase, and inflation hardest to hide, suggesting an explanation for why people feel significantly higher inflation than is reported. But I’d need to know a little more before settling on an explanation.
Is it normal to see inflation rates lowest at the consumer end (CPI) and increasing the further up the production chain you go, reaching a peak at crude goods? That’s what it seems to be every time I see the numbers reported, at least the last few years. But that’s not sustainable, and we should see the reverse just as much, right?
I might be talking out of my arse here, but my guess is that what you said is true only if the ratio between producer good and consumer good is one to one. But if one producer good has a price of $100, then consumer goods can have prices of $1, if that producer good goes into the production of at least 100 of those consumer goods (ignoring labor and other costs for simplicity).
The index tries to measure the general level of prices, so it is normalized over the number of goods one unit converts to at the different stages. If all produer goods are single-unit $100 items, which then get split into 100 pieces before being sold to consumers, then an X% increase in the price level of the former should imply a (steady-state) X% increase in the price level of the latter, even with smaller units.
Naturally, the retailer would add value in other ways, increasing the final consumer price, and so this is one way a differential would show up. For example, if retailing labor became cheaper over a period (e.g. through automation), then you could see (for a time) consumer goods inflating in price slower than producer goods. But the rates would not differ if labor costs changed uniformly across the whole economy.
Silas,
This article may have the answers you are looking for.
Um…this one: http://scholar.googleusercontent.com/scholar?q=cache:VDwpfy-_nYMJ:scholar.google.com/+does+the+PPI+lead+the+CPI%3F&hl=en&as_sdt=0,24
My bad.
Summary? (I read the lead, and it doesn’t give any hints as to the dynamics that justify his analysis; he just restates the problem. Another academic who can’t write a summary…)
Given it’s for a Fed Economic Review, he might have assumed everyone knows what he’s talking about.
I was actually thinking the section you would be interested in is how the PPI and CPI are actually created. Section 2 or 3, I think.
Given it’s for a Fed Economic Review, he might have assumed everyone knows what he’s talking about.
Yes, once he makes a *reference* to that effect. But he *didn’t* make a reference to that effect in his introduction, when the purpose of the entire article is to explain how that effect results in PPI differing from CPI.
Anyway, if you understand the article well enough to recommend it, you can probably give me one or two sentences that explain the key difference that makes the two (or six) metrics diverge. Maybe get a little practice summarizing too!
So, you’re obsessed with Krugman and Sumner, yet you don’t understand they’re calling for a return to the pre-crisis inflation trajectory, which would require 4+% core inflation? In all seriousness, you should get your head examined. Something’s very wrong.
David S. you’re out of your element.
Ohhhhhhh, they just want the old inflation back, their view is just so much more justified than I had previously and hastily thought!
???
It’s like cut and paste, only with econometrics. You just have to make the lines match up… Everything that happened in between, well that no longer exists. Ok, I think I got it now.
🙄
“Exactly how long will it take us to get over that “hump”? Does it make sense that headline CPI is up 3.9% over the last twelve months”
I think the temporary rise already happened and is over with. We had high inflation for a period of 6 months or so and then it slowed down and went back to normal in recent months. The problem lies with the arbitrary nature of using 12 months. As the months pass, the “12 month change” is dropping off the very low inflation months from last year and adding the regular mild inflation of recent months. So the “12 month change” continues to rise despite the stabilized inflation rate.
Although… the recent drop in commodity prices makes me think they’ll eventually have to go right back up. They seem to low to for me for a recovering world economy.
you seem to be saying that the only reason reported inflation is so high is that last year’s price level was lower than this year’s price level. When you get pulled over, would you try to get out of a ticket by telling the cop, “the only reason your radar reported me as speeding is because my car was travelling faster than the speed limit. If it weren’t for that you’d have nothing on me”
And low world commodity prices are a good thing, despite their effects on the nominal statistics. It means that less people in poor countries have to starve. Remember that the Arab Spring started when world food prices started going ballistic last year
Bob, you certainly live dangerously.
Prepare for a flood of responses if CPI ticks down even _slightly_. It will be “See! See! Liquidity trap! Deflationary spiral! Stop it, before it’s too late!”
Marris, nah, I already swallowed that poison pill. At this point on the margin there’s no harm in me worrying about price inflation for another few years, at which point I will have to publicly admit I was wrong (again).