• Tag Archives Consumer Price Index
  • The Money-Velocity Myth

    For most financial commentators an important factor that either reinforces or weakens the effect of changes in money supply on economic activity and prices is a velocity of money.
    It is alleged that when the velocity of money rises, all other thing being equal, the buying power of money declines (i.e., the prices of goods and services rise). The opposite occurs when velocity declines.
    If, for example, it was found that the quantity of money had increased by 10% in a given year, – while the price level as measured by the consumer price index has remained unchanged – it would mean that there must have been a slowing down of about 10% in the velocity of circulation.
    The mainstream view of money velocity According to popular thinking the idea of velocity is straightforward. It is held that over any interval of time, such as a year, a given amount of money can be used again and again to finance people’s purchases of goods and services. The money one person spends for goods and services at any given moment can be used later by the recipient of that money to purchase yet other goods and services.
    For example, during a year a particular ten-dollar bill might have been used as following: a baker John pays the ten-dollars to a tomato farmer, George. The tomato farmer uses the ten-dollar bill to buy potatoes from Bob who uses the ten dollar bill to buy sugar from Tom. The ten-dollars here served in three transactions. This means that the ten-dollar bill was used 3 times during the year, its velocity is therefore 3.

    This post was published at Ludwig von Mises Institute on June 27, 2017.

  • Global Equity Markets Firmer As Oil Stabilizes, Greece Gets Bailout Money

    (Kitco News) – World stock markets were mostly higher overnight. Crude oil prices are firmer today, which helped out the equities. Also, Greece’s creditors approved another release of bailout money for the indebted country, which assuaged European investors. U. S. stock indexes are pointed toward slightly higher openings when the New York day session begins.
    Gold prices are modestly up in pre-U. S. market trading, on a technical and short-covering bounce from solid selling pressure seen earlier this week.
    In overnight news, Russia’s central bank cut its key interest rate by 25 basis points. The Russian ruble rallied on the news.
    The Bank of Japan held its regular monetary policy meeting Friday and made no major changes in its policy.
    The Euro zone’s consumer price index for May was reported down 0.1% from April and up 1.4% from a year ago. The numbers were right in line with market expectations but down from the European Central Bank’s target rate of around 2.0% annual inflation.

    This post was published at Wall Street Examiner on June 16, 2017.

  • Why ‘Suddenly Hawkish’ Yellen Brushed off the Dip in Inflation

    She did her homework. And consumers got a temporary gift. A ‘suddenly hawkish’ Yellen, as she is now being prefaced by some voices, brushed off the dip in inflation when she spoke after the FOMC meeting yesterday.
    Inflation backtracked a tiny bit. The Consumer Price Index rose ‘only’ 1.9% year-over-year in May, and the core CPI without food and energy rose ‘only’ 1.7%. ‘Only’ in quotes because there is still enough inflation to whittle away at the purchasing power of wage earners who have to make do with stagnant wages and retirees who have to live off their near-zero-yield savings.
    But Yellen looked at the details of the inflation reports and discovered that there were some one-time or short-term factors that brought inflation down a bit – and none of them are going to last.

    This post was published at Wolf Street on Jun 15, 2017.

  • What Would Yellen Do, with these Retail Sales?

    The death spiral of the department store.
    Retail sales overall were not a disaster in May. But there were some disaster areas. Total retail sales in May dropped 0.3% from April, to $473.8 billion and were about flat with January, adjusted for seasonal variation and holiday and trading-day differences, but not for inflation, according to the Commerce Department this morning. But year-over-year, retail sales were up 3.8%.
    This year-over-year increase was in the middle of the five-year range of 1.6% to 5.2%.
    The Consumer Price Index rose 1.9% in May, year-over-year, according to the Bureau of Labor Statistics this morning. So the increase in ‘real’ retail sales, adjusted for inflation, was 1.9% year-over-year. This is also in the middle of the five-year range of 0% to 4.3%. In other words, in May, ‘real’ retail sales grew at the same lackadaisical rate we’ve seen for years:

    This post was published at Wolf Street on Jun 14, 2017.

  • Deflation, Easy Money, and the Boom-Bust Cycle

    According to the president of the Federal Reserve of St. Louis James Bullard the current level of US prices is noticeably lower than what it would be if the Federal Reserve had delivered on its 2% inflation target, calling the trend ‘worrisome.’ The yearly growth rate of the consumer price index (CPI) eased in April to 2.2% from 2.4% in March.
    Many economists maintain that a fall in prices generates expectations for a further decline in prices. As a result of this, it is held, consumers postpone their buying of goods at present since they expect to buy these goods at lower prices in the future. For most economists and various commentators a decline in the growth rate of the CPI raises the likelihood of an outright general decline in prices, which is labeled deflation and is considered to be a terrible thing.
    Consequently, this weakens the overall flow of spending and this in turn weakens the economy. A fall in consumer expenditure subsequently not only weakens overall economic activity but also puts further pressure on prices. Or so it is argued. Note that from this it follows that deflation sets in motion a spiraling decline in economic activity.

    This post was published at Ludwig von Mises Institute on June 2, 2017.

  • Inflation Isn’t Evenly Distributed: The Protected Are Fine, the Unprotected Are Impoverished Debt-Serfs

    Welcome to debt-serfdom, the only possible output of the soaring cost of living for the unprotected many who are ruled by a hubris-soaked, subsidized Protected Elite.
    The Consumer Price Index (CPI) measure of inflation is bogus on a number of fronts, a reality I’ve covered a number of times: though the heavily gamed official CPI is under 2% for the past four years, the real rate is 7% to 12%, depending on whether you happen to live in locales with soaring rents/housing and healthcare costs. The Burrito Index: Consumer Prices Have Soared 160% Since 2001 (August 1, 2016) Revealing the Real Rate of Inflation Would Crash the System (August 3, 2016) The Disaster of Inflation–For the Bottom 95% (October 28, 2016) But the other reality is that inflation is not evenly distributed throughout the economy or populace: many people have little exposure to the crushing inflation of healthcare and higher education. For these people, inflation is a non-issue or a minor impact on their wealth, income and lifestyle.

    This post was published at Charles Hugh Smith on WEDNESDAY, MAY 24, 2017.

  • Don’t Believe ‘Eerily Low’ Inflation in Canada: National Bank

    This is how it’s ‘understated.’
    We have long lamented the persistent understatement of soaring US housing costs in the Consumer Price Index, and thus the understatement of overall inflation as experienced by people with a roof over the head. But now two economists from the National Bank of Canada spell out their doubts about the housing inflation component in Canada’s overall CPI.
    The Consumer Price Index in Canada rose 1.6% in April year-over-year seasonally adjusted, Statistics Canada reported last week, same as in March, but down from 2.0% in February. Over the past four years, CPI inflation ranged from 0.4% to 2.4%.
    For inflation lovers, it was too tame. But Canadians – like Americans who’re in a similar boat – have long complained that life overall is getting a lot more expensive a lot faster than reflected in the CPI. And a big part of that expense is housing costs for owners and renters.

    This post was published at Wolf Street by Wolf Richter ‘ May 23, 2017.

  • This Is How an Asset Bubble Gets Unwound these Days

    What the slow crash of classic car prices says about the future of other asset classes.
    The global asset class of collector cars – these beautiful machines are perhaps one of the most enjoyable asset classes to play in – is quietly but persistently and very unenjoyably experiencing a downturn that parallels and in some aspects already exceeds the one during the Financial Crisis.
    The index for collector car prices in the May report by Hagerty, which specializes in insuring vintage automobiles, fell 0.68 points to 160.06, down nearly 10% year-over-year, and down 14%, or 25.8 points, from its all-time high in September 2015 (185.86).
    Unlike stock market indices, the Hagerty Market Index is adjusted for inflation via the Consumer Price Index. So these are ‘real’ changes in price levels. Since September 2015, the Consumer Price Index has risen 2.8%. So in unadjusted terms, comparable to stock market indices, the price levels dropped nearly 17%.
    To put that into a Financial Crisis perspective: The index peaked in April 2008 at 121.0, then plunged 16% (20 points) to bottom out in August 2009 at 101.39. So the current drop of 14% from the peak in ‘real’ terms is just below the drop during the Financial Crisis, but the current 25.8-point-drop from the peak already exceeds by a wide margin the 20-point drop during the Financial Crisis.

    This post was published at Wolf Street on May 17, 2017.

  • Is Bacon Feeding the War Machine?

    The Wall Street Journal offered a cute news scoop that ice cream is more important than bacon when tracking what has come to be known as inflation. Sarah Chaney was stalking the U. S. Department of Labor Blog and stumbled on the post ‘Ice Cream vs. Bacon.’
    No doubt, those on the paleo diet would be stunned to know ‘the average dollar amount per year that all U. S. households spent on ice cream was $54.04, while the average amount on bacon was $39.07,’ claims the department’s post.
    Why Does the Price of Bacon Matter?
    Why this matters to number-crunchers at the labor department is ‘the more people spend on an item, the more inflationary changes to its cost will affect the total inflation rate,’ explains Department of Labor blogger Steve Henderson. And in this case, ‘bacon has increased in price almost 32 percent over the past 10 years while ice cream went up 21 percent over the same time period.’
    There are inflation indexes for most everything and are all rolled together into the Consumer Price Index (CPI) to form a market basket.
    Of course, Mr. Henderson and his fellow workers believe they are doing ‘God’s’ work at the Labor Department. He emphasizes:
    ‘Policymakers, researchers, journalists, government bodies and others use the CPI to make important decisions that directly affect American citizens.’
    Yes, but as I related in ‘Garbage In Garbage Out at the Federal Reserve,’ the collection of this precious data is, well, somewhat suspect.

    This post was published at Mises Canada on MAY 12, 2017.

  • The Fed Gets another Reason to Raise Rates and Unravel QE

    Inflation pressures further up the pipeline rise the most in 5 years.
    The Producer Price Index, which measures inflation at the wholesale level for goods and services, and thus up the pipeline from the Consumer Price Index, jumped 2.5% in April from a year ago, the steepest increase since February 2012, blowing past consensus expectations of 2.2% (chart by Trading Economics):
    On a monthly basis, seasonally adjusted, wholesale prices rose 0.5% from March. Nearly two-thirds of that increase was due to services, the biggest part of the US economy, where prices increased 0.4% from March. Among the standouts, services less trade, transportation, and warehousing, jumped 0.8% from March.
    And it wasn’t ‘food and energy’: the PPI without food and energy (‘core’ PPI) jumped 0.7% from March, its 11th month in a row of increases. It’s up 2.1% year-over-year. Back in March, it was up only 1.7%. So picking up momentum.

    This post was published at Wolf Street on May 11, 2017.

  • Rising Oil Prices Don’t Cause Inflation

    Correlation vs. Causation A very good visual correlation between the yearly percentage change in the consumer price index (CPI) and the yearly percentage change in the price of oil seems to provide support to the popular thinking that future changes in price inflation in the US are likely to be set by the yearly growth rate in the price of oil (see first chart below).
    But is it valid to suggest that a price of an important input such as oil is a key determinant of the prices of goods and services? It is true that producers of goods and services set asking prices. It is also true that producers, while setting prices, take into account various production costs including the cost of energy.

    This post was published at Acting-Man on May 11, 2017.

  • Devonshire: True Inflation Is Three Times Higher Than Officially Reported

    A fascinating, recent report by the Devonshire Research Group, whose recent work on Tesla was featured here one year ago, has moved beyond the micro and tackled on of the most controversial macroeconomic topic possible: what is the true rate of inflation. What it finds is that, like others before it most notably Shadowstats and Chapwood, the accepted definition of inflation, or CPI, is dramatically understated for various reasons, both political and economic.
    For those unfamiliar with the “alternative” explanations of inflation measurement, and the implications if CPI is indeed drastically underestimating true inflation, the report is a real eye opener.
    Devonshire sets the scene by noting that a wide variety of Price Indices are used to adjust for the effects of Inflation on the economy. These adjustments are widely applied to derive a number of common measures and underlie many critical economic and asset management concepts
    Price Indices: the Consumer Price Index (CPI), the Producer Price Index, the GDP Deflator Economic concepts: the Standard of Living, Real Income and Output, Real Economic Growth Asset Management concepts: Real Interest Rates, the Risk-Free Rate of Return, the Cost of Capital

    This post was published at Zero Hedge on May 9, 2017.

  • The Connection Between Money-Supply Growth and Inflation

    In the article ‘Rapid money supply growth does not cause inflation’ written by Richard Vague at the Institute for New Economic Thinking, December 2, 2016, the author argues that empirical evidence shows that increases in money supply has nothing to do with inflation. According to Vague,
    Monetarist theory, which came to dominate economic thinking in the 1980s and the decades that followed, holds that rapid money supply growth is the cause of inflation. The theory, however, fails an actual test of the available evidence. In our review of 47 countries, generally from 1960 forward, we found that more often than not high inflation does not follow rapid money supply growth, and in contrast to this, high inflation has occurred frequently when it has not been preceded by rapid money supply growth.
    Now Vague defines inflation as, three or five consecutive years of increases in the consumer price index (CPI) of 5% or more. Based on this he has concluded that an increase in the money supply does not cause inflation.

    This post was published at Ludwig von Mises Institute on April 5, 2017.

  • Central Banks’ Obsession with Price Stability Leads to Economic Instability

    Fixation on the Consumer Price Index
    For most economists the key factor that sets the foundation for healthy economic fundamentals is a stable price level as depicted by the consumer price index.
    According to this way of thinking, a stable price level doesn’t obscure the visibility of the relative changes in the prices of goods and services, and enables businesses to see clearly market signals that are conveyed by the relative changes in the prices of goods and services.
    Consequently, it is held, this leads to the efficient use of the economy’s scarce resources and hence results in better economic fundamentals.
    The Rationale for Price-Stabilization Policies
    For instance, let us say that demand increases for potatoes versus tomatoes. This relative strengthening, it is held, is going to be depicted by a greater increase in the price of potatoes than for tomatoes.
    Now in an unhampered market, businesses pay attention to consumer wishes as manifested by changes in the relative prices of goods and services. Failing to abide by consumer wishes will result in the wrong production mix of goods and services and therefore lead to losses. Hence in our example, by paying attention to relative changes in prices, businesses are likely to increase the production of potatoes versus tomatoes.

    This post was published at Acting-Man on May 4, 2017.

  • Goldman Sachs Prepares to ‘Better Weather Future Disasters’

    Regular prudent savers & government guarantees to the fore.
    Wouldn’t it be great if a big hedge fund could borrow for five years at a fixed rate of 2.05%, just barely above the cost that the US government pays for five-year debt (1.81%)? It’s especially great considering that inflation, as measured by the Consumer Price Index, is 2.4%. In real terms, the rate on this five-year loan would be negative.
    Or borrow at 1% daily rate? This would be way below the rate of inflation. And on the rare occasion that creditors gang up on you and try to get their money back all at once, the Fed steps in as lender of last resort. You can rely on that. So no biggie.
    You could lend this money out at 5% or 7% or, if you’re into credit cards, at 21%, for example, and keep the difference. Or better, you could bet with this money on the riskiest trades, some of them long-term illiquid deals that might take a decade or longer to unwind. Or you could play with highly leveraged derivatives.

    This post was published at Wolf Street by Wolf Richter ‘ Apr 27, 2017.

  • Why Bonds Aren’t Overvalued

    Doug Kass wrote a very interesting piece this week on the bond market:
    ‘As overvalued as I believe the U. S. stock market may be, fixed-income instruments may be even more overvalued.
    Yesterday the 10-year note was yielding 2.21% – the lowest yield since last Nov. 11 – and the long bond’s yield is down to 2.88% after weak core consumer price index (CPI) and retail sales were released on Good Friday, when the markets were closed.
    This decline in yield and rise in bond prices may be the last opportunity for a generation to sell fixed-income positions. Indeed, bonds may now represent the single most overvalued asset class extant.’
    Before I start getting a bunch of ‘hate mail,’ let me state that I greatly respect Doug’s opinion. In this case, however, I simply have a differing view.
    Both Doug and I agree that stocks are indeed overvalued. Since investors pay a price for what they believe will be the future value of cash flows from the company, it is possible that investors can misjudge that value and pay too much. Currently, with valuations trading at the second highest level in history, it is not difficult to imagine that investors have once again overestimated the future earnings and cash flows they might receive from their invested capital.

    This post was published at Zero Hedge on Apr 20, 2017.

  • Atlanta Fed Slashes Q1 GDP Forecast To Just 0.5%, Lowest In Three Years

    Just over two months ago, the Atlanta Fed “calculated” that Q1 GDP was going to be a pleasant 3.4%, confirming that the Fed had made the correct decision by hiking not only in December, but also last month. Since then, the Fed’s own GDP estimate has crashed in almost linear fashion, and as of this morning – after the latest disappointing retail sales report – it had plunged to just 0.5%, which if accurate would make Q1 the weakest quarter going back three years to Q1 2014.

    From the regional Fed:
    The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2017 is 0.5 percent on April 14, down from 0.6 percent on April 7. The forecast for first-quarter real consumer spending growth fell from 0.6 percent to 0.3 percent after this morning’s retail sales report from the U. S. Census Bureau and the Consumer Price Index release from the U. S. Bureau of Labor Statistics.

    This post was published at Zero Hedge on Apr 14, 2017.

  • Better Call Stan! Atlanta Fed’s Q1 GDP Forecast Falls to 0.5% (Retail Sales Decline for 2nd Straight Month, Weekly Earnings Growth Flat)

    This is a syndicated repost courtesy of Confounded Interest. To view original, click here. Reposted with permission.
    The Atlanta Fed’s Q1 2017 GDP forecast has declined further to 0.5%.
    The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2017 is 0.5 percent on April 14, down from 0.6 percent on April 7. The forecast for first-quarter real consumer spending growth fell from 0.6 percent to 0.3 percent after this morning’s retail sales report from the U. S. Census Bureau and the Consumer Price Index release from the U. S. Bureau of Labor Statistics.
    Yes, retail sales advance MoM is down in March by -0.2% following February’s print of -0.3%. And CPI MoM was down -0.3% in March as well.

    This post was published at Wall Street Examiner by Anthony B Sanders ‘ April 14, 2017.

  • World Stock Markets Ending 1st Quarter With A Whimper

    (Kitco News) – Global stock markets were mostly weaker Friday. U. S. stock indexes are pointed toward modestly lower openings when the U. S. day session begins. The U. S. stock indexes have made impressive price rebounds from selling pressure seen early this week, including the Nasdaq stock index hitting a record high on Thursday.
    Gold prices are modestly lower as the U. S. day session is set to get under way. The rebound in the U. S. dollar index this week has weighed on the precious metals markets.
    Friday is the last trading day of the week, of the month and of the first quarter, which makes it an extra-important trading day from a technical perspective.
    In overnight news, the Euro zone consumer price index in March was up 1.5%, year-on-year, versus a reading of up 2.0% in February. The March reading was less than expected.

    This post was published at Wall Street Examiner by Jim Wyckoff ‘ March 31, 2017.

  • The Fed’s Half-Hearted Attempt at Monetary Tightening

    On 15 March, the Federal Reserve (Fed) raised the federal funds rate by 0.25 basis points, bringing the band of the official rate to 0.75 – 1.00 percent. The move was widely expected. However, the market seemed surprised when the Fed reaffirmed that it would stick to its plan to raise rates no more than three times this year because inflation has already taken off. In February, the consumer price index was up 2.7 percent compared to last year, while the ‘core inflation rate’ stood at 2.2 percent – well above the 2 percent mark typically seen as the level of ‘targeted’ inflation. As a result, the current short-term interest rate in the US, when adjusted for current inflation, stands at around minus 1.7 percent.
    The slowness with which the Fed is bringing rates back up suggests that they are certainly not in a hurry to put an end to ongoing debasement of US-dollar money balances and US-dollar denominated debt. There is, however, a reason why the Fed might actually be quite keen to keep real interest rates into negative territory: If the interest rate borrowers have to pay on their debt is lower than the economy’s growth rate, the economy’s overall debt-to-GDP level comes down over time; or the debt-to-GDP ratio increases at a slower pace even if borrowers keep running into even higher debt. In the US – as well as in basically every other industrialized country in the world – interest rates have been brought down by central bank policies over the last decades, while public debt has grown. At the same time, interest payments on public debt have come down thanks to central banks having pushed interest rates to ever lower levels. With US short-term interest rates having remained well into negative territory since around the start of 2008, the US debt burden has been eased considerably. Against this backdrop, it becomes apparent that the Fed’s room for maneuvering has been reduced substantially.

    This post was published at Ludwig von Mises Institute on March 21, 2017.