18 Aug 2011

I’m Still Not Seeing the Deflationary Threat

Economics, Federal Reserve, Inflation 76 Comments

Today the BLS put out its official Consumer Price Index numbers. From July 2010 to July 2011, unadjusted CPI rose 3.6%.

Yesterday the Producer Price Index (PPI) numbers came out. Here is the breakdown of 12-month changes by category:

Finished goods +7.2%
Intermediate goods +11.6%
Crude goods +22.6%

If I didn’t know any better, I’d say prices can rise even in the face of high unemployment…

76 Responses to “I’m Still Not Seeing the Deflationary Threat”

  1. Silas Barta says:

    No, you don’t understand Bob, prices are going down, just in a way that’s observationally equivalent to living costs going up.

  2. Brian Shelley says:

    Silly Bob, those numbers only apply to people who actually have to pay for those goods. With the surge in people receiving food stamps, section 8 housing, etc…, the average price paid is actually dropping.

  3. Subhi Andrews says:

    Bob, But we live on iPads alone.

  4. Jon O. says:

    That’s some nasty margin pressure. And yet people keeping asking for more inflation because of dis-inflation risk, as if it’s this binary thing.

    Input prices rise faster than consumer prices; consumer prices rise faster than wages and RE prices; and most people/firms get squeezed.

    Maybe someone will realize this doesn’t help demand.

  5. Brent says:

    Yeah, I wish you’d quit saying you were “wrong” about inflation. You might have been wrong about double-digit increases in (official) CPI growth, but who cares, prices across the board are generally way up.

    • Blackadder says:

      prices across the board are generally way up.

      No, they’re not.

      • Silas Barta says:

        So, I take it you don’t pay the bills in your household?

        • Blackadder says:

          So, I take it you don’t pay the bills in your household?

          I pay all my bills. Do you?

          • MamMoTh says:

            I take you don’t buy bitcoins

          • Silas Barta says:

            Yes. What bills have you seen on a secular downtrend, other then technology-driven quality improvements?

            • Blackadder says:


              My biggest single monthly expense is for rent, which hasn’t gone up a penny in the last three years.

              • Silas Barta says:

                Great. Mine has.

                Any others?

              • Dan (DD5) says:

                But rent has gone up quite substantially during the housing boom. What’s the average rent today compared to, say, 2001? I bet you it’s higher.

              • Blackadder says:

                It would be easier just to state which of my bills are “way up,” which was Brent’s claim.

                Answer: none.

              • Subhi Andrews says:

                Rents in Bay Area are up a lot in the last couple of years.

              • Blackadder says:

                What’s the average rent today compared to, say, 2001? I bet you it’s higher.

                That’s probably true. So what?

              • Captain Anarchy says:

                Rent is a really bad example. Real estate just came out of a bubble, so it is reasonable to expect consistent or decreasing rent prices, even in the presence of general inflationary forces.

                Food and energy are up, raw metals are up, various consumer goods are up, etc. It’s not hard to see price inflation outside of government CPI numbers.

              • Blackadder says:


                I agree that looking at individual items can be misleading (particularly if you switch which item you look at depending on the circumstances.

                If you look at an overall price index, what you find is that inflation has been low (and you don’t have to use the government CPI numbers; the Billion Prices Project numbers say the same).

      • Brent says:

        You have to be kidding me. Seriously, do you get out much? Personally, everything is up — cable & internet, rent, energy, insurance, gasoline, used cars, even postage stamps.

        But more to the point, up until May, I worked pricing for a big grocery & general merchandise wholesaler / retailer. I saw the big pricing companies’ sheets on Midwest MSRPs for tens of thousands of items, the company’s sheets on MSRPs for its stores, and the actual prices we’d put out at local stores. Across the board – for literally tens of thousands of items – the products have gotten smaller and their prices are way, way up. You would be laughed – no, scoffed – at if you tried to tell ANYone who does pricing for major corporations that prices aren’t much higher today than they were a couple years ago.

        • Blackadder says:


          As it happens I know a guy who does pricing for Wendy’s (and used to do so for Dell). He did not laugh or scoff at me, though he did say that food commodities prices are up a lot and that Wendy’s has raised its prices about 4% over the last 11 months. Nothing he said surprised me or contradicted anything I’ve said here.

          • Silas Barta says:

            Nothing he said surprised me or contradicted anything I’ve said here.

            Apparently, because you didn’t even take your own “omg low inflation lol” seriously.

  6. stickman says:

    Bob, I sense you being somewhat coy, but this is disingenuous. The deflationary “threat” (operative word) calls for a response to the looming double-dip and possible deflationary depression. Just as the previous rollouts of QE were largely aimed at combating the adverse affects of debt-deflation, etc in the wake of the Great Recession.

    Two open questions (in an entirely non-snarky, legitimately-interested sense):
    1) If the FED and co. hadn’t resorted to aggressive MP actions, do you think we would have avoided deflation?
    2) Seeing as the numerous calls of hyperinflation have failed to materialise despite QE 1 and 2, what makes anyone confident that it can be expected now? (And if you say “gold”, I’m going to say “10-year yield”…)

    As for crude oil… There’s plenty to say about coming off a record fall and so forth, but, um, Libya anyone?

    • stickman says:

      Related: Anyone else following the amusing tête-à-tête between Nouriel Roubini and the Zero Hedge collective on Twitter?

    • Subhi Andrews says:

      Crude oil was up 120% from the 2009 bottom before Libya.

      • Blackadder says:

        Crude oil was up 120% from the 2009 bottom before Libya.

        And it’s down 45% from the 2008 peak despite Libya.

        • Subhi Andrews says:

          It sure is. It was up nearly 100% in a few months in 2008. That’s not an apt comparison. More stable band of price in the 2005-08 time period was between $50 and $80

          • Blackadder says:

            Then why choose the bottom in 2009 as your start point?

            • Subhi Andrews says:

              That’s a good point. However, Price of oil crossed $100 in this so called deflation. It crossed 80 even before there was Libya issue, higher than the average price in 2007. And its not just oil, look at any commodity, the story is the same, many commodities hit new highs in 2010 and 2011.

              I will probably agree with you on couple of things – If not for QE 1 & QE 2 we would have had real deflation. I am not sure that would have been as bad as most people portray. Secondly, hyperinflation calls were/are premature.

  7. Bob Roddis says:

    Pater Tenebrarum explains Nouriel Roubini:


  8. jjoxman says:

    I’m just confused as to why anyone thinks price deflation is bad. If the concern is monetary deflation, I can understand that. But price deflation is a good thing.

  9. David S. says:

    Well Bob, you obviously don’t know any better. You’re using the term “rising” with respect to inflation, which indicates current activity, yet refer to previous period data. This is obviously prima facie contradictory, not that many commenters here could ever notice.

    Forward-looking metrics indicate falling inflation very clearly:

    Inflation swaps: http://www.bloomberg.com/apps/quote?ticker=USSWIT5:IND

    Ten year breakeven: http://www.bloomberg.com/apps/quote?ticker=USGGBE10:IND

    And this is while the Treasury yield curve is falling:


    And of course, stock prices are falling today, and have been overall for weeks.

    To anyone who actually understands economics, this is all indicative of falling future demand and hence disinflation, at the very least.

    I’ve added to my shorts on US and EU stock indexes, commodities other than gold and silver, luxury goods producers and sellers, the Euro versus the dollar, and have increased my long positions in Treasuries and inferior goods producers and sellers, among many similar moves. I did likewise after seeing day 2 of the market reactions after the Fed announced its new extended period language.

    I’ve a fairly long time horizon on these derivatives, making room for additional Fed and ECB and Eurozone government action, which I expect to be exposed as insuffiicient within the next year. I consider this a pretty safe bet.

    • Major_Freedom says:

      You’re using the term “rising” with respect to inflation, which indicates current activity, yet refer to previous period data. This is obviously prima facie contradictory, not that many commenters here could ever notice


      Prices go up from time = 0 to time = 1.

      But don’t say prices are rising, because time = 0 is an arbitrary starting point.

      Forward-looking metrics indicate falling inflation very clearly

      Inferred inflation expectations on inflation protected government debt do not at all measure the actual rate of inflation for goods and services in general.

      By that logic, because the market rated mortgage backed securities AAA, they should not have collapsed.

      And of course, stock prices are falling today, and have been overall for weeks

      …this is all indicative of falling future demand and hence disinflation, at the very least.

      The inflation rate for consumer goods that has been reported is 3.6%, which is quite high. Producer price inflation is even higher. You’re ignoring reality.

    • Silas Barta says:

      Sure, the mentally-retarded (foreign central banks, pension funds, life-insurers) and evil (Federal Reserve) are gobbling up Treasurys at insanely high prices. I guess that’s proof that inflation will be low, but the rally in gold isn’t?

  10. Jonathan M. F. Catalán says:

    Do you think deflation is ever a threat?

    • stickman says:

      I’m not sure if this was in response to my comment… and whether a) it is normative in the sense of “is deflation ever bad?”, or b) positive in the sense of “are we at risk of deflation now”. Still:

      a) Yes, certainly. Primarily, as per Fisher. You disagree? If so, I’m curious to know why. (There are also associated problems of self-fulfilling deflationary expectations and the effects of wage rigidity on employment, but I’ll leave those as side issues for the moment.)

      b) Again, yes. For conventional reasons associated with mass liquidations and risk-aversion in a severe-enough recession, or depression.

      Of course, that’s not to say that all deflation is equally, or necessarily bad. (Gains from productivity and so forth.) However, clearly that’s not the type of deflation we’re talking about here.

      • Jonathan M. F. Catalán says:

        It meant for Bob.

        If deflation isn’t bad, then what’s the “risk”?

        Here is a “paper” I wrote on monetary deflation (a rise in demand for money); I also talk about wage/price inflexibility there.

        In Austrian theory these mass liquidations are a positive, so our differences should be well known there.

  11. Daniel Hewitt says:

    Shouldn’t this stuff go back down now that QE2 is over, and bank credit is being destroyed?

    • Dan says:

      M2 is growing at 10.1% SA 13 week growth from last Thursday’s numbers which is a doubling from the June 30th report. There is 1.6 trillion in excess reserves right now and if banks are loaning them out, which it looks like they are, then we don’t need any more QE to keep driving prices higher.

      • Daniel Hewitt says:

        I’m not so sure they will lend them out, because the collapse in stock prices is killing their capital.

        • Dan says:

          Well right now the data shows they are increasing their loans. Required reserves have shot a lot over the past month or so. Unless this trend reverses and the growth in money supply and required reserves slows down then I’m with Robert Wenzel and expect stocks to start climbing in the US as the economic indicators start improving.

          • Dan says:

            13 week growth SA now growing at 11.6 percent. Unless I did the calculations wrong required reserves growing at 39% annualized over the last 2 months and excess reserves continue to fall.

            • Dan says:

              11.4% not 11.6%

    • Silas Barta says:

      Just a “heads-up”: during the time that oil wen from ~$105 to ~$85 (about 20% decline), I saw retail prices for premium unleaded go from about $3.90 to $3.75.

      Am I supposed to be dazzled?

      Also, I haven’t seen any precipitous decline in baked goods prices coincide with this wheat price contraction.

      Isn’t it funny how all these price collapse seem to disappear the moment you try to predicate a budget on them?

      • Dan says:

        I’m with you Silas. I’m paying about $75-100 more a week at the grocery store. I used to go to the grocery store with 100 bucks and pay cash and get everything I needed. Also consider that this is only food I buy at the store these days. I stocked up on everything else a long time ago. I don’t know how people that have no savings and living pay check to pay check are managing.

        • Blackadder says:


          If your grocery bill has doubled and you aren’t buying a greater quantity/quality of food, then you may be shopping in the wrong place.

          • Dan says:

            Maybe I can get you to come out and set up all my bills since none of yours are rising

          • Silas Barta says:

            Maybe you should go shopping without food stamps some time.

        • Silas Barta says:

          Good to see another sanity-checker coming out of the woodwork, Dan. For all the deflation we’re suffering, stuff is sure pretty expensive!

      • Ryan Murphy says:

        I’m glad that the one gas station near where you live is more relevant than the global price. It’s not like gas prices dropped way more than that a couple years ago after people were shrilly screaming about inflation because of high gas prices. Wait that happened.

        All I want is a something to point to that would be evidence of mass inflation under circumstances X and evidence of mass deflation under circumstances Y. If you point to gas prices only when they are increasing, you’re only confirming biases.

        • Silas Barta says:

          A good test would be to show a simple, wise household budget that would be better off by assuming <3% price change in the past three years, as opposed to assuming 10% price increase. The latter will better match up with your experiences.

          I’m glad that the one gas station near where you live is more relevant than the global price.

          No, that was pretty much the norm … 20% decline in oil, 2% decline in the related prices people *actually* pay. And I don’t point to gas prices “just when they’re going up” … of course gas prices contracted in ’08. (Don’t you think stable gas prices after a sharp drop in oil is an important data point?)

          Let me know when we return to the pre-’05 trend, because oil has seemed to reach a permanently high plateau.

          Again: why does all the evidence of deflation disappear the moment you have to pay bills? That’s a sign of a poor model of inflation.

          • Ryan Murphy says:

            So re-weight CPI, throw it into a spreadsheet, and show me that we have significant inflation today but not significant deflation a few years ago. You can’t do that without using weights that are more insane than what they use at the moment. This should be very easy to convince me since your so cocksure.

            • Silas Barta says:

              I already took a first stab at the problem. That alone should give you pause.

              The overwhelming fraction of the purported deflation/disinflation, to the extent that it’s real, is the collapse in home prices, and one-sided quality adjustments (adjusting CPI down for even the questionable quality improvements and technology gains not related to changes in dollar value, but not adjusting up for degradations).

              I can look at virtually any item at the (extended) grocery store, and not see it having worn out the inflation. Beef jerky (store brand) was $8/lb in 2006, now it’s $12 for 3/4 lb. Atlantic salmon was $7/lb, now it’s $11/lb just for farm-raised. Similar trends in nuts/almonds, baked goods, etc. Some have kind of receded, but nowhere near back to what a 1%/year would suggest.

              Again, deflation seems to exist everywhere except when you go shopping.

              • Blackadder says:

                If you look at the Billion Prices Project (which does not include housing) their inflation numbers are not much higher than the CPI.

              • Silas Barta says:

                @Blackadder: And if you look at your household budget, you’ll find the numbers are much higher than the CPI.

            • David S. says:

              I learned early on not to engage these philistines directly. You are wasting your time. You may find you’re better off just stating your position and maybe interacting with Bob. The rest of the peasants will only drain your focus with nonsense.

          • Blackadder says:

            Gas prices tend to lag oil prices, with a longer lag for decreases than increases. Given that oil was over $100 as recently as a few weeks ago it’s not shocking that the oil price decrease hasn’t fully worked its way through to the pump yet.

            • Silas Barta says:

              Prices track replacement costs, not purchase costs. It shouldn’t take this long for gasoline to be revalued.

        • David S. says:

          Ryan, these people don’t understand numbers any better than your dog. They will always be peasants.

          As you can see above, I actually offer forward-looking metrics, and even a bit about my current investment positions. They will ignore these things as I make a lot of money over the next year. This has been going on for years.

          • Silas Barta says:

            Are you going to ignore the money I made on gold? And should I ignore the money you’re losing on stocks?

  12. Jason B says:

    I’ve been in the automotive parts industry since 2005. Every month there are price changes so we get to see real time changes. A court of generic oil in 2005 sold for $1.50. That same court of oil today sells for $3.29. Batteries have roughly seen a 65% price increase since ’05. Hard parts, i.e. brakes, axles, rotors, belts, hoses, etc., have seen perhaps a 25% increase. Washer fluid, which is 95% water, moved from $0.98 in 2005 to $1.98 today.

    Another inflationary consequence, which is very frustrating for a lot of customers, is that in order for companies to maintain pricing, products are switched to lower quality manufacturers. Quality control is not as stringent, and the product has reduced wear capacity, along with increased fitment issues. These are things such as tools, and hard parts. With automotive repair shops in my area being 95% small businesses we have seen increased warrantee claims for part failures and installation issues. This creates more work for the shops, us, the corporation, and quite substantially reduces productivity in our field.

  13. stickman says:

    Related: http://uneasymoney.com/2011/08/17/defending-the-dollar/

    …The Bureau of Labor Statistics announced the latest reading (for July 2011) of the consumer price index (CPI); it stood at 225.922. Thirty-six months ago, in July 2008, the index stood at 219.133. So over that entire three-year period, the CPI rose by a whopping 3.1%. That is not an annual rate, that it the total increase over three years, so the average annual inflation rate over the whole period was less than 1%. The last time that the CPI rose by as little as 3% over any 36-month period was 1958-61.

    And… Since the “increase” in all-item CPI is dramatically skewed by the substantial rise in energy costs relative to all other G&S, here’s an older but goodie (gooder?) post from Matt Rognlie: http://mattrognlie.com/2011/05/07/inflation-is-always-and-everywhere-a-monetary-phenomenon/

    • bobmurphy says:

      Stickman, why did you put “increase” in quotation marks? +3.6% isn’t “really” going up?

      My word I’ve got the hardcore guys mad at me for even using government numbers at all (or reproducing charts from FRED), and I’ve got the inflation deniers putting “increase” in quotation marks.

      • Major_Freedom says:

        It’s like a torturer being embarrassed about the wails of pain from his victim, so the torturer says that the victim is “yelling.”

      • bobmurphy says:

        Actually Stickman, I had read your comment on my Blackberry and didn’t see the context. I get now why you put “increase” in quotation marks, though I still think it’s funny.

        • stickman says:

          Thanks Bob, I didn’t think that I was being that obtuse! Or even moronic 🙂

          Still, I guess it’s ambiguous/sloppy enough to be taken the wrong way,which is pretty amusing as you say…

  14. Yancey Ward says:

    None of you get it. We gotta have big inflation spikes that destroy demand so that central bankers can have a deflation to fight in the future.

  15. gday says:

    Bob, you need to come up with a new adjustment for the numbers so that you can declare ‘Adjusted for manipulation’.

  16. cathy says:

    Has anyone here noticed that WTI crude is at $81 and change, while brent is at 105? How do you explain that?

    @Blackadder, you can repeat the same thing over and over all you want. It won’t make anyone here believe you because what you are saying is completely counter to our every day experience. I work in a natural foods grocery and have been watching the prices rise steadily, I was going to say over the past couple of years, but it really is my WHOLE LIFE. Anyone who claims there is no inflation is clearly either: A. not paying any attention, or 2. drinking the kool aide.

    Hope you like the taste at least, cause it’s killin’ ya.