15 Jun 2011

Consumer Prices Up 3.6 Percent Over the Year

Inflation 29 Comments

Well the CPI came out today. And even playing by the government’s own rules, the headline rate rose a seasonally-adjusted 0.2 percent in May. More important, from May 2010 to May 2011, CPI rose 3.6 percent.

And the reason Krugman should be a little concerned, is that “core” CPI–which he says is a better indicator of the underlying inertia–rose 0.3 percent in May. [UPDATE: I botched the original extrapolation; fixed.] So if you robotically extrapolate that, it works out to 3.7 percent core inflation per year–almost double the Fed’s ostensible target.

Just to clarify, Krugman wasn’t citing a prediction of negative headline CPI for May, but for June. However, I think the analysis he linked to was way way off for May, so we’ll see what happens for June. And to repeat, I think what’s happening is that Krugman and the Fed guy were expecting tame core CPI, coupled with moderating/falling gas prices.

29 Responses to “Consumer Prices Up 3.6 Percent Over the Year”

  1. AP Lerner says:

    And the 10 year is rallying 10 bps on this news. As is corporate debt
    When in doubt, go with what the market is saying. And the market is not worried about inflation in the least bit.

    • James E. Miller says:

      Two can play this game Lerner:
      From the New Federation of Independent Business Index of Small Business Optimism Report:

      # Inflation continues to rise, a notable business concern for owners who are raising their own prices at the fastest pace seen in years.


      Just looking at what the market is saying after all….

      • AP Lerner says:

        I didn’t realize the NFIB was a tradeable market. I’ll need to look into that.

        • James E. Miller says:

          I was just citing it for evidence that inflationary expectations are up on small business in this country. I am assuming that it counts as “what the market is saying.”

          Whether they are right or wrong for raising prices to forecast higher future prices is their own problem.

          • Joseph Fetz says:

            It isn’t only small business, larger businesses such as Ford and Walmart have cited increased costs as a factor of their raising the prices of goods. I have cited this problem before (about a month ago), and while it does put extra pressure on retail costs it does not guarantee that the consumers will purchase those goods at that increased price. While it is often convenient to look at CPI measures as proof that there is/isn’t inflation, the price differentials of business are more important in my mind.

          • Joseph Fetz says:

            I also think that input vs output prices are going to have dramatic affects in the coming years as consumer income declines, and input prices of production increase in a market of decreased demand; this dynamic will transfer a poor reality upon employment.

            • Joseph Fetz says:

              And/or wages

  2. Jon O. says:

    down 4 bps actually. And they were up 11 yesterday. Long bond only down 2 bps after +10 yesterday.

    TIPS rallying across the board with the 10yr down 6 bp. So 10yr TIP breakeven rate is actually up a bit. Oh and the 5yr TIPS is trading at NEGATIVE 51 bp.

    So ya its a good idea to look at the markets; it’s a better idea to look at the right ones.

    • Jon O. says:

      Should also note that traders went after the belly of the curve(5-30 steepened over 4 bp,) more likely a QE3 anticipation trade as econ data softens and commodoties take a breather.

      • AP Lerner says:

        I’ll give you the benefit of the doubt on the above comments, since you were probably a little quick to pull the trigger.

        “and commodoties take a breather.”

        So you expect deflation too. Cool!

        • Jon O. says:

          so 1) you quote a wildly inacurate price and 2) looked at a market that prices in a number of things rather than a market that (almost)solely prices in inflation expectations and you don’t see the problem?

          The initial reaction to the data (what we are discussing) had TIPs rallying harder than treasuries, and the belly rallying harder than the long end. So one of the key inflation markets reaction to the CPI was not deflationary. You saw what you wanted to see by looking at nominal rates in a vacuum. (If you want to talk about the dollar, or equities, or comm. thats another story – but you didn’t mention them)

          What’s gone on in the last hour has to do with the massive panic, euro sell-off from whats going on particularly in Greece. The euro crosses are blowing up and creating a severe risk-off and flight into treasury. That trade has seen TIP breakevens turn around. The last hour or so the market has given off strong deflationary signals.

          The point of your post was about the markets reaction to the CPI. Unless you feel the market lags the data by about 4 hours you’re wrong. You can talk about what yields have done in the last hour but if you think that has to do with a reaction to the CPI and not fears of what’s going on in EUR and Europe well…

          btw, I’m not an ideologue stuck defending my predictions for inflation/deflation. That’s why I attemp to take an objective look at the markets. I realize that’s a shocking thing for some.

          • RS says:

            Jon O.

            FYI, you are, in fact, being an “ideologue”, even though you perhaps don’t realize it.

            Citing effects on specific markets caused by other specific antecedent factors requires that you have established a causal relationship that you believe is true.

            That is ideology.

            Without it the various events you describe would appear totally unrelated to each other. The only way you could relate them is by inferring causality, which requires that you make certain ideological assumptions (formally or informally) about what effects can come from which causes.

            • Jon O. says:

              Being an ideologue and having ideas are different things. The former word is used in a perjorative sense, refering to someone who’s dogma is so strong they can’t, or won’t ,appreciate empirical evidence to the contrary. (Save the lecture on austrians and apriorism.)

              A complex theory of financial economics was not responsible for the analysis above. Common sense and experience was. Greek unrest, rumors of French bank downgrades; some risk spreads spiking; A ~300 pip move in the EUR/USD; a big sell off in risk assets; a big rally in treasuries – not too tough to connect the dots.

              • RS says:

                Then I suppose the term “ideologue” is an anti-concept, since it is not used to refer to a system of ideas (i.e. an ideology) but is meant to smear someone who has different ideas with which one disagrees with.

              • Joseph Fetz says:

                Let me ask you Jon, if GDP increases by 20%, does that necessarily mean that quality of life has increased by the same degree? I hate to use this example (because it is so obvious), but GDP increased at a pretty good clip during WWII, but what was the increase of utility during this time? Obviously, this cannot be measured empirically…. But, it can be elaborated upon and studied in a scientific context.

              • Jon O. says:


                Ideologue: an often blindly partisan advocate or adherent of a particular ideology.(merriam-webster)

                Note the phrase “blindly partisan”

                Joseph Fetz,

                I never claimed there was no room for theory. My point was that when your theory is undermined by the real world you can’t just ignore or distort the real world.

                I have a number of theories about the financial-economy; they tend to change quite often as new information arrives.

              • Joseph Fetz says:

                “I have a number of theories about the financial-economy; they tend to change quite often as new information arrives.”

                As do I, but they are based upon core facts and/or assumptions of action of which most everybody here is aware of (if they have read Austian material). I usually try to stick to the basics and then progress from there, Theory is primarily the result if these core facts and assumptions. Sure, information will change all of the time, and new theories can replace old theories, but I do not just change a theory based upon new information, I first test whether it fits into the context of the facts and assumptions that provide the base for such theories.

                Any theory can have a groundwork based upon facts or information as they come about, but that is merely correlation. How do you form the causative foundations of your ever-changing theories? Do you have a methodology?

              • RS says:

                @ Jon O.

                And what exactly does “blindly partisan” mean? How are you not being “blindly partisan” by insisting that the changes in certain prices are caused by the factors you listed but not other factors favored by the other “partisans”?

                The fact that you see causality in certain “facts” and not others MAKES you a partisan. Does that mean you are “blind” to other causes? Should I brand you an “ideologue” because you put more emphasis on one potential cause and not anther? Suppose I said that the change in CPI was caused by the recent eclipse of the moon or the change in sun spot activity. Those are facts just like the panics in Europe. How come inferring causality from the former is “blindly partisan ideology” but the latter is “objective” and “empirical”?

                What makes one dogma and not another? You seem to take for granted that certain causal assumptions are universal but it is those very assumptions of “universality” that constitute a system of ideas formally known as ideology.

                Words like “ideologue” or “extremist” anti-concepts; they are a smear tactic, a way of shutting off debate by pre-judgment and intimidation and not by argumentation as to the actual merits or failures of particular ideas.

              • Jon O. says:

                Joseph Fetz,

                “I first test whether it fits into the context of the facts and assumptions that provide the base for such theories. ”

                Facts are facts. They either confirm or refute your theory. No nuance. No context.

                “How do you form the causative foundations of your ever-changing theories? Do you have a methodology?”

                My method is simple: apply a simple theoretical framework to the current reality. If reality conflicts with the theory, I change the theory.


                The basic point is: I accept that I may be wrong and am willing to admit it if the evidence says so. On the point in question I think it’s pretty clear who is wrong. AP Lerner has his theory about deflation and regardless of what CPI or TIP breakevens or input prices or the yield curve or inflation swaps do he will simply ignore or misinterpret them to maintain his theory. This is pretty obvious when he talks about nominal 10yr rates without looking at 10yr breakevens.

                I still think you are missing the difference between positing an idea and being and ideologue.

              • RS says:

                Jon O.

                I understand the difference, what I am trying to point out to you is that at some basic level we are all “ideologues” because it is that “simple theoretical framework” which you are applying to the current reality of “facts” (I would phrase it as a “context” of facts) that allows you to see causality between certain facts and not others so you are discriminatory between which facts you deem as having causal connections and those that do not. That, in essence, makes you an “ideologue” in the sense that you are “partisan” to some facts and not to others.

                I am not trying to say that you are wrong in your CPI estimations (I think you are right). Instead, I am pointing out that you must necessarily use an “ideology” (i.e. a theoretical framework of ideas) to determine which facts you think contradict your theory and which do not in order for you to admit that you might be wrong. It’s a subtle point I know but it is nevertheless true.

        • Joseph Fetz says:

          AP, as a person who is a follower of market trends, as well as a student of economics (though, I have no formal training), I find that your statements are often directed toward short-term outcomes. Yes, there will probably be a short-term rally in the dollar, but as I have explained before, I expect this to be primarily a domestic phenomenon. In global markets, the dollar will probably see some nominal gains (with due dependency upon the European problem), but nothing astronomical to make a longer term projection of a deflationary course with regard to the dollar.

          As I have stated before, there will be domestic deflation in terms of consumer goods sold in the United States, many things will go down in price, but the global commodity markets will only see a moderate dip with regard to the consumer prices sold in the United States; this only exacerbates our current problems.

          While you seem to think that yields will continue their continued decline as per the current bid-to-cover movement, I see this as a move before the storm, that most buyers of treasuries expect a declining yield based upon a rising dollar (or, are getting in on the last POMO), that the demand-hole left by the Fed’s cease of purchases will indeed lead to an increase in yields (TIPS are a fantastic indicator in this respect). The response of the Fed will most necessarily be the implementation of QE3, but they must give due cause for such, and the ultimate reason that they will fall back on will be increasing yields, the debt ceiling, and the effects thereof due to their ceasing of purchases (not to mention off-budget concerns that are much deeper).

          Will there be a dollar rally at the end of QE2? Sure, of course, and many of us are counting on it. Will it last? No, yields will not play with the standard dynamic due to global demand for dollars; or, more accurately, future dollars- but increasing yields will lag a bit compared to dollar strength. Yields must necessarily rise, because there are not going to be enough buyers to fill the void, and if there are enough (to fill the void), they will only be doing so in debased monies (thus, no aggregate change in FX). The dollar rally will be domestic, and will primarily be focused upon CPI. I see a bigger separation arising between CPI and PPI (and crude goods and commodities).

          The primary consideration that I have been harping on for at least 4 weeks is not the decline in CPI, but the disparity between CPI (domestic) and the input prices of production (which are more or less global). Looking at CPI is great, but just because their prices decline, that does not mean that it changes the dynamic between input prices and output prices; the problem does not go away. The problem will necessarily manifest itself in either higher unemployment, or decreased wages, there is no way to get passed this.

          To look at just CPI or Core-CPI is to entirely ignore the structure of production itself. While prices overall may decline in the US, this does not correct the problem of global prices of higher order goods needed by American producers, nor does it attempt to account for the disparity of crude, intermediate, or finished goods in the structure of production in order make consumer goods possible, and at a price that will clear the market.

          The problem as I see it has not to do with inflation/deflation per se, but with the effects of such on the structure of production and consumption when it comes to actually clearing the market. You can follow every release of CPI information, but you still will not know what the effects of such prices are in the factors of production, or the effect of time on those factors. Looking at a predetermined basket of goods just does not do justice to the prices encountered by producers, the proposed clearing prices that they offer, or the demand curves of the buyers. CPI just looks at a number without understanding the time and investment involved.

          Domestic deflation with regard to CPI? Yes, this will happen after QE2 ends. But, I also expect to see an increased disparity between input prices as compared to output prices in production; the primary brunt of this will fall on non-farm wages and employment.

  3. Yancey Ward says:

    Core rate isn’t the right measure, I thought.

    • bobmurphy says:

      Yancey, right, I don’t like it. But Krugman’s whole spiel has been that core won’t go anywhere because of high unemployment. Yeah maybe headline will bounce around because of volatile commodities, but good ol’ core will be flat. And yet it jumped up in May too.

      • Yancey Ward says:

        That comment of mine was tongue in cheek.

        • Joseph Fetz says:

          It is often hard to tell when people are joking in written word, it’s just the nature of the medium (sarcasm is usually the most difficult to spot).

  4. WT? says:

    Bob, you are being slightly misleading here. The annualised CPI for all items is 3.6% and the annualised CPI for ‘all items less food and energy’ (core, I guess) is 1.5% NOT 3.7% as you suggest.

    If you are going to compare these two alternate measures of inflation, they should be compared on the same basis.

    …just saying…

    • Jon O. says:

      Annual y/y rate and annualized m/m rate are two different things.

    • bobmurphy says:

      If you were misled, then I was obviously being misleading (though not my intention). I didn’t refer to them as both “annualised,” I referred to them specifically as what they are.

      Also, I wasn’t just picking the things that made my case. I think year/year is good for seeing the trend, so that’s why I reported year/year regular CPI. But Krugman recently linked to a Fed guy saying we would get negative headline CPI in June, because of flat core (meaning one-month core) and falling gas prices. So I was pointing out that the thing Krugman is saying is flat (because of high unemployment) actually rose “unexpectedly” in May.

  5. Bob Roddis says:

    From Stefan Karlsson:

    That gains in “headline” (all items) inflation precedes (or in other words predicts) changes in “core inflation” rather than the other way around is something that I’ve pointed out for years. The reason for why this is the case is that “core” prices are usually less flexible and more sticky, meaning that increased inflationary pressures will first be evident in food and energy prices, and only later in “core” prices.