Median CPI Annual Inflation Falls for 20th Straight Month to a Record Low of 0.5% = No Inflation
Historically, the median CPI has been 50% more accurate at gauging future inflation than the traditional CPI (based on the Cleveland Fed's research), and the median CPI is certainly not now showing any signs of inflationary pressures. In fact, a stronger case could be made for deflation right now than inflation, according to: a) the median CPI being at a 26-year low, and b) the decelerating growth of the money supply (annual growth of 2% or below each week since early March) , see chart below (data here).
"To repeat the obvious, because others won’t, money growth is almost flat. Flat money growth does not cause inflation—especially when we have enormous slack in the economy along with rapid productivity growth and declining unit labor cost. We may get inflation in the next few years, but, if so, it will be based on money growth yet to happen. It hasn’t happened yet."
For the "opposing view," see Scott Grannis's recent post "Inflation Pressures are Building in the Production Pipeline."
36 Comments:
Prof. Perry, I know that you and Scott Grannis have a good natured disagreement about inflation/deflation and both of you make good arguments. Mr. Grannis had a May 28th posting that stated that both Deflation and Inflation are alive and well. Pricing: Durables vs. Services; never beffore, since data first kept in 1959, have these price indices moved in opposite directions.
It seems like you both could take credit for being correct in a sense. Any comment(s)?
worth noting:
Inflation-Depressing Seasonal Factors Reverse in June and July. The May CPI and PPI reports again were depressed by seasonal factors that reduce reported seasonally-adjusted energy inflation at this time of year. For example, the BLS reported that May gasoline prices rose by 0.7% (Department of Energy reports a 0.9% drop), before seasonal adjustment. After seasonal adjustments, though, gasoline prices fell by 5.2% for the month. Seasonally-adjusted inflation numbers have little meaning for individuals who have to fill their gasoline tanks with real-time dollars, which are not seasonally adjusted
Those energy-related seasonal distortions, however, start to reverse in June, becoming neutral in that month, with reported energy inflation getting spiked sharply by the seasonals in July, irrespective of whatever is happening at the gas pump. Accordingly, the recent pattern of minimal monthly contractions in the seasonally-adjusted CPI should be at an end, at least for several months.
Unadjusted, the CPI-U annualized rate of inflation for the three months ended May 2010 (May versus February) was 2.68%, against April’s 2.46%.
Unadjusted, May’s year-to-year inflation was 2.02% +/- 0.20% (95% confidence interval) against a 2.24% annual increase in April.
forest and trees
from 1920 to 1960 the CPI increased by 48%
from 1960 to 2008 it increased by
727%
to me any money growth is debasing of the currency
but I forget
our money is fiat money with no backing
bix-
all money is ultimately fiat. gold is only valuable if we all agree that it is. try trading gold coins for water in a lifeboat.
nor are "asset" backed currencies immune to adulteration. consider what happened to gold when the spanish started bring it back from central and south america by the fleet load. or to commodities like cowrie shells etc.
even useful currency metrics like kilowatt hours are subject to massive "inflation" if say, cold fusion were made to work.
there is no perfect answer to the money problem, just alternate systems of cost/benefit.
this is not to argue that we could not be doing a better job with fiat currencies or that we aren't hurting ourselves trying to eliminate the business cycle's downturns, just making the point that like democracy, fiat currencies may be the least bad option we have.
Jimmy Hoffa is dead. Inflation is dead.
You got unit labor costs going down, not up. You got commercial rents of all kinds, office, industrial and retail, in the toilet.
You got MZM down from a year ago, not up.
You have global competition in most markets.
You have a de-unionized US labor force.
The Fed can print money until the plates melt, and I hope they do.
gettingrational: Good point about this being the first time service prices and durable prices are moving in opposite directions. If service prices are going down and durable prices are going up, isn't this an indication that real income would be falling. If the price someone is paid for their service (labor) is dropping while the physical goods they are buying is going up, this sounds like a sign of a drop in real income.
JWY_1985, Service prices are going up and Durables down. The ones that are hurt by increasing service prices are the more mature in age because they are using more services. Younger people are building nests wardrobes, etc. and so they benefit. Agree? Click on the link in my first comment.
BTW, we have a state sales tax that does not include services here in the left-hand corner (WA).
Thus, the burden of the sales tax is more on the young and I think we should tax services -- but lower the overall rate (a dream).
The U.S. had massive excess assets, goods, and capital before the recession began. Now, those excesses are smaller, because they've been destroyed (through idle resources) rather than consumed (through tax cuts).
At some point, when enough excesses are destroyed, or demand picks-up, demand will exceed supply, and that'll trigger accelerating inflation.
So, we'll have slow growth, while the excesses are destroyed and slow growth after the excesses are destroyed (because the Fed will tighten the money supply to preempt inflation).
A much less efficient economy will replace the most efficient economy the world has ever seen. The cost of living will rise and living standards will fall.
Morganovitch has it right, if you look at the 19th century you find periods of inflation in the 1850s caused by the California and other gold rushes, as well as 1898 into the 1900s caused by the Klondike. If you think about it it makes sense gold is a commodity like any other, find more of it and the price of other commodities in gold terms goes up, and if mining declines the converse happens. The same happens if you are from Yap and decide that large round stones (10 foot diameter) make good money (they are of course hard to steal).
Recall that basically all money does is to replace direct barter of goods with bartering on both sides with bartering with a defined commodity that we call money, be it a metal or perhaps the state of bits on a disk drive.
I am not dead I have just been very tired from overwork in recent times.I need a long rest.
Jimmy!
Glad to hear from you. We all thought you were dead and had given up hope!
Nixon has gone away, and we lost our pipeline into the White House..
morganovich, good point about commodity-backed currencies also being subject to inflation, but I think the point of the gold bugs is that the limited supply of gold at least acts as a kind of brake on inflation, as opposed to the unlimited treasury bills that currently back Federal Reserve notes. I think the gold bugs are even wrong about that, as fractional-reserve banking has allowed banks to create private money for centuries, but I don't think they're all ignorant enough to assign some basic intrinsic value to gold or believe that gold is the "perfect" money. I agree that fiat currency was the best the US could come up with, though it hasn't worked so well in countries with loose central banks (just like democracy hasn't worked in countries with cultures that aren't used to it? Russia, for example). However, there is a lot of innovation coming with money too, as money is fundamentally an information business, which will be upended like all other information businesses today. I have some ideas on what that will look like, suffice to say it'll be a lot better than what we have today. :)
Morganovich:
"there is no perfect answer to the money problem"
TRY MILTON FRIEDMAN maybe that's as close as you can get.
gold is only valuable if we all agree that it is
No product, service or commodity is valuable unless at least two people agree that it is. I do not understand the resistance to the idea of gold as currency. I mean, try to exchange a $100 bill against water in a lifeboat, too.
What's your point other than to defend our current system of pieces of paper that bureaucrats can rob of their value at will?
(And, no, the Spain example isn't equivalent).
Craig, the resistance to gold comes from the fact that it is a silly and outmoded store of value. If both gold and a hundred dollar bill are useless on a lifeboat, that means neither has any advantage in that example. While it is true that bureaucrats decide how much paper money is printed today, Fed bureaucrats have learnt from the inflation in the 70s that they do so at their peril. Ultimately, it is up to the populace to decide what they want to use and if they all choose e-gold, there's not much the govt can do about it. I think we will see completely new forms of "money" in the coming decades, because of the great changes the internet brings to the information business of money, so we're about to ditch both antiquated systems of money, gold and Federal Reserve notes. ;)
Sprewell:
There is a simple answer to all problems including money.
``````DON'T VOTE FOR IDIOTS``````
Ask candidates questions before you vote. If they are smart and you like what they say vote for them.
grant, I've got an even better solution for you: DON'T VOTE. When there isn't any Federal Reserve or Fed notes and we're all using fully privately issued notes instead, which will happen in the next decade or two, there won't be any govt to vote for. Rather you will vote with your feet everyday by deciding what you want to buy. :)
morganovich said...
"consider what happened to gold when the spanish started bring it back from central and south america by the fleet load."
In that case Spanish inflation was caused by the government stealing money from other people. US inflation is now caused by the government stealing money from its own people.
"even useful currency metrics like kilowatt hours are subject to massive "inflation" if say, cold fusion were made to work."
Wow! I would almost be willing to put up with inflation if that were the cause of it!
sprewell said:
"When there isn't any Federal Reserve or Fed notes and we're all using fully privately issued notes instead, which will happen in the next decade or two, there won't be any govt to vote for."
That sounds like the best idea I've heard in a long time. How do you see that happening?
Ron H The US has been there and done that: We had a system of private banknotes from the time Andrew Jackson killed the second bank of the US until the Civil War. One had to have a publication to see which were genuine bills, and the further one was from the bank the less they were worth. The US had a couple of big panics (1837 and 1857) Notes were easy to counterfeit and you also had a lot of corruption. The Civil War introduced the National Bank. A National Bank could issue banknotes of a common design backed by US government bonds. Other issuers of currency paid a 10% tax on the currency. This system lasted until 1913.
In this time period banking consisted of honest bankers and crooks and it was hard to tell who was who.
sprewell:
Thanks for your good advice: I think there is somewhere in the world where they still issue the old type notes that were written on the bank itself. I have a feeling that it is still done in the UK but I am not currently absolutely sure.
Maybe that could be bought in on a trial basis but you would have to get past big bin benankle.
Do you have any information on what type of inflation was around in the past when the private bank notes were issued? Was it lower then?
Thanks, Lyle, We've had an interesting history, that's for sure. I was curious as to how sprewell thought this would come about today. I've heard calls for ending the Fed, but never a suggestion that we return to private banknotes.
>"Notes were easy to counterfeit and you also had a lot of corruption."
This is normal operation for the Fed today.
>"In this time period banking consisted of honest bankers and crooks and it was hard to tell who was who."
I don't see that anything has changed.
Ron, private "money" will flourish online, similar to e-gold but with much better commodity backing, everything from grain futures to options on new tablet computing devices. "Money" is essentially an implicit option on future consumption: with current technology, those options can be made explicit and digitally bartered for each other without "money" as the medium of exchange. Note that anywhere from 50-90% of money in circulation today (depending on what measure of money you use, M1 or M2 or whatever you prefer) is privately issed by banks as checks or credit, so most money today is already privately issued, a point most people don't understand. These private dollars are backed by bank assets, everything from real estate loans to commercial credit. The future of "money" is making those instruments on their own and removing "dollars" as the intermediate medium of exchange. When the dollar is removed by this private action, the Fed will cease to exist as they will have lost their primary lever on the market. It will take a decade or few to fully make the transition, as all contracts denominated in dollars today will have to be amended to take into account the new digital barter system, but just as nobody remembers life without cell phones today, you will hardly remember dollars in 20 years. ;)
grant, from what I've seen, inflation was choppier back then, with some wild swings from inflation to deflation from year to year, but tended to average out closer to zero than today. I once saw a great graph that showed this, not sure where, but this is the closest I could find just now. Note how despite all the noise in the annual inflation rate the cumulative CPI stayed relatively stable for centuries, but after inflation took off 50-60 years ago, annual rates have been remarkably smooth, with the exception of the rampant inflation of the 70s. It is arguable that the wild swings of the pre-1960 period were more destabilizing, as nobody knew what prices and interest rates to bake into their long-term contracts as a result. The key thing to realize about inflation or deflation is that it doesn't much matter what the rate is, all that matters is that it matches expectations, so that people can plan for the future. In that respect wild swings are very destabilizing, as nobody could have known for sure that the next swing wouldn't presage rampant sustained inflation or deflation. Note that we're not talking about wild swings of money supply here, we're talking about the actual CPI swinging wildly! Hummel and Henderson have argued persuasively that the post-1980 period of smooth inflation rates can be attributed to Greenspan's remarkably laissez faire approach at the Fed. It only gets better when we remove the possibility of Fed control altogether. :)
"Before 1933 was the Age of Gold. Back then a dollar your grandfather saved in the early 1800s would buy the same amount of goods and services as a dollar you saved in the early 1900s! Can you imagine living in an environment where housing prices never skyrocketed, where grocery prices were always constant, where transportation and energy prices never rose, and where the value of money was as solid as the gold that fully backed it? Compared to today’s tragic environment where the prices of life’s necessities relentlessly rise every year and impoverish millions, the Age of Gold was financial paradise!"
ADAM HAMILTON
Thanks, sprewell, a giant online commodities exchange where everyone plays is an interesting idea. I'm not sure that those who think they know what's best for us in every detail of our lives will agree. And, I wouldn't expect the Fed to go easily. Many believe that only some such group of "experts" can keep our economy from driving directly into a ditch.
I think you are underestimating the interest government has in this matter. Control of the currency and money supply gives government almost total control of our economy, and it won't be given up easily.
Thanks for the great CPI chart: although not a direct indicator of inflation, it is close enough. This chart looks familiar; was it produced by Michael Mann? It seems to rise alarmingly in the late 20th century. (sorry, I couldn't resist)
I noticed that past major volatility in annual rates coincide with the financing of war efforts in 1812, Civil War, WW1 and WW2.
It's really hard to miss the increase in cumulative CPI after the manipulations of gold price in the 1930s, and then the remarkable trend since Tricky Dick cast us entirely loose from the gold standard in 1971. Do you suppose there's any connection?
With the value of our dollar almost entirely in the hands of the Fed, we can see that since 1913, when the Fed was established, the dollar has lost 95% of it's value. What a dollar would buy in 1913 now costs $20.
I think the best description of the definition of money I have ever seen was from Larry Burkett in Your Finances in Changing Times. Larry usede a two page description of a society that started with barter and developed a monetary and banking system based on nails. Bags of nails in the book were ideal as money because they met the three requirements of money 1) intrinsic value 2) a store of wealth, and 3) divisible (one nail as minimum).
Our current money has two problems by this definition: first it has no intrinsic value and second it is not a good store of wealth. The fed has declared a target inflation rate of 2%. At 2%, money loses ~80% of its value in a lifetime.
I disagree with those who say gold does not have intrinsic value. It is very useful as a metal because it doesn't corrode, is easy to work with, etc. If gold were far cheaper, it would be used more widely.
BIX 1951+ SPREWELL
Is it still realistically possible to have a gold standard.
Would there be enough gold in existence to support it.
Is there enough new gold being discovered to be able to support it.
Is it possible for a gold standard to be flexible enough today to be able to accommodate an ever expanding world population and the need to create the economic growth to be able to support it.
If the answer is no then maybe Milton Friedman was a future desciple ahead of his time.
I think this is my view.
Ron, it doesn't much matter what the politicians think about these coming innovations, because frankly they are too dumb to see it coming. They were too dumb to do anything about Fannie and Freddie, although senators like McCain warned about a collapse like this years ago. Most congressmen worry about how to extract rents from established business, so to the extent the marketplace is becoming permanently more competitive and fast-paced, their ability to interfere gets washed away. Of course, they can always accidentally place barriers to change: for example, the current mooted financial services regulations will stifle future financial innovation to some degree, but people will always find a way around it, just as derivatives traders found ways around capital requirements for regulated financial instruments while the SEC was wholly ignorant of derivatives. The Fed has already gone easily, if you look at how Greenspan gave up much of their powers through deregulation. As for those who believe the Fed is controlling everything, an alternate boogeyman that does nothing of import can always be constructed for them. ;)
I think you greatly overestimate the control that govt has over the money supply today and the supposed power that gives them. Govt power comes from the almost 40% bounty that they rob from every transaction and the foregone revenue snuffed by their dumb laws, the money supply is an irrevelant distraction by comparison. Ha, Michael Mann, :) I am suspicious of the long-term price stability shown in that CPI chart in the pre-1960 period. The value of the dollar is an irrelevant bogeyman, what matters are stable and predictable interest rates and by that measure the laissez faire Fed and large, fluctuating private money supply of the last 30 years have performed remarkably well. It wouldn't much matter if we had 20% yearly deflation, as long as we could predictably know it would stay at 20% and could write all our contracts to take that 20% into account. What matters is the predictability of deflation, not the actual rate.
Junkyard_hawg1985, the intrinsic value of currency isn't that important, as fiat currencies have demonstrated for a century. It's nice to have in a real emergency, so that you can still eat your chocolate money if it loses all other value, but by then you've got much bigger problems. ;) Inflation of 2% is irrelevant when most people are in savings accounts that offer 3%. Most people hold very little cash: half of all print dollars in circulation are held abroad. It is not that gold doesn't have intrinsic value, it is that its intrinsic value is nowhere near $1,250 per ounce and more importantly that it is not practical for everyday use and coinage. We would use gold a lot more for its actual practical uses if it weren't for the irrational attachment of gold bugs, who drive the price up to fantastic levels because they are too stupid to find real investments.
grant, the gold standard has been a dumb idea for a century or so, Friedman was smart enough to understand that. However, tying "money" to some commodity backing is a good idea. My idea is to remove money altogether and go back to digital barter, where you trade the option to buy toothpaste in 5 months for someone else's option to buy Pop Tarts in 3 months. With current technology, it can all be automated so that you don't need any "money" at all. This is the future.
Junkyard_hawg1985, for more fascinating reading on the subject of money, try this.
"I am suspicious of the long-term price stability shown in that CPI chart in the pre-1960 period.
Are you reading that correctly? I don't believe the chart indicates that PRICES were stable, only that the RATE OF CHANGE was stable
"the gold standard has been a dumb idea for a century or so, Friedman was smart enough to understand that. However, tying "money" to some commodity backing is a good idea.
sprewell, if you believe that, then what commodity would you suggest? If gold is a dumb idea, then why wouldn't any other commodity also be a dumb idea?
Ron, I was talking about the pre-1960 period, where CPI supposedly stayed pretty much the same for a hundred years. I'm skeptical that it was that stable for so long. The rate of change was actually highly variable during that time, but supposedly it all averaged out to zero. As for what commodity backing to use, there are a multitude out there, such as commodity futures or mortgage securities. Better to have used those rather than precious metals that aren't as widely used. Under fractional-reserve banking, banks do issue private money that is backed by all their assets, which consist of a myriad of such securities and real assets, so this is nothing new either. Money is essentially an information business, where the information about how much work of value you've done was stored 300 years ago in how much gold you had and is stored today in bank ledgers. However, with the advent of the PC and the internet, there are much better ways to handle this information and I claim the digital barter scheme I've limned is the endgame in the next 20 years. Let's see how soon that happens. :)
"Junkyard_hawg1985, the intrinsic value of currency isn't that important, as fiat currencies have demonstrated for a century."
Let's see. Would this list of countries with successful fiat money for the past century include:
Germany
Zimbabwe
Argentina
Russia
Brazil
Hungary
Yugoslavia
Bolivia
Turkey
Angola
Austria
Belarus
Bosnia
Bulgaria
Chile
China
Georgia
Greece
Israel
Japan
Mozambique
Nicaragua
Peru
Poland
Romania
Taiwan
Ukraine
Democratic Republic of Congo
Junkyard_hawg1985, I already noted that fiat currencies haven't worked so well in countries with loose central banks. But that's not the issue in my quote, it's whether the currency having "intrinsic value" would have made a difference. And the truth is that under fractional-reserve banking, it doesn't. Even in 1900, capital reserve ratios under fractional reserve banking were around 15%, meaning most of the money back then was privately issued and backed by bank assets that weren't gold. And ultimately intrinsic value has very little to do with why gold was used historically. Gold was used because there was a limited supply and people felt that provided a brake on money supply expansion. Money could have been backed by wall clocks or spices, all that mattered is that the supply couldn't be expanded greatly in a short time, a criterion which even gold failed when new lodes were found. As the above linked graph showed, the gold standard was accompanied by wild swings in inflation, either because of new gold discoveries or govt or bank-created money supply expansion. With fractional-reserve banking, the genie came out of the bottle long ago, the gold standard is a vestigial idea that shouldn't even be considered.
sprewell said: "...meaning most of the money back then was privately issued and backed by bank assets that weren't gold."
What bank assets? The loans banks made (and make now) when they created private money was not liquid. They couldn't call in loans that specified repayment at a later date.
Fractional banking involves a bit of fraud, in that banks assure depositers that their money is available any time they want it, but that's simply not true.
"Gold was used because there was a limited supply and people felt that provided a brake on money supply expansion."
...as well as the fact that it is durable, easily recognized, is easily divided into smaller units of weight, and had no other use except as jewelry, which you might consider a way of storing your money.
"Money could have been backed by wall clocks or spices, all that mattered is that the supply couldn't be expanded greatly in a short time..."
Spices HAVE been used as money, but not universally, and not at all times. Wall clocks don't meet any of the criteria for money. In fact, many of the things you have suggested as money don't either.
I'm not advocating for a return to the gold standard here, but there is some reason why gold has been the most widely used form of money by most cultures and civilizations in all parts of the world throughout history.
When Europeans first traveled to Asia to trade for goods not available in Europe, they were able to trade gold as both isolated civilizations recognized it as money.
"...a criterion which even gold failed when new lodes were found."
True, but these swings were relatively short-lived as the chart shows. You have questioned the apparent stability of the cumulative CPI historically, and I would suggest that this is mostly due to the gold standard.
Notice how the CPI heads higher as the gold standard is tweaked, and then abandoned altogether.
Ron, just because the assets that banks started backing their private money with weren't highly liquid doesn't mean they weren't backed by something. They couldn't always call in loans but they could usually resell them in secondary markets if necessary. Considering that liquidity is almost never an issue- how often did people bother to redeem in gold?- this is one of the reasons non-gold-backed private and fiat money won. I once thought like you that there was some kind of fraud going on with fractional-reserve banking, but I mostly don't think that anymore. The confusion, which I think even many economists fall prey to, comes from the fact that "dollars" are actually issued by two parties, private banks and the Fed. The Fed prints about $800 billion in paper dollar bills, backed mostly by treasuries, and an additional amount in electronic reserves, which is usually small but which Bernanke recently expanded to around a trillion dollars. Banks issue around $1-9 trillion in dollars, depending on which measure of money supply you use, in the form of checks and electronic credits, which are backed by around 50% of bank assets on average. The banks claim that they will repay you with the govt's paper dollars if you ask and most of the time they can. Just because they won't be able to if everyone liquidates at once doesn't invalidate the fact that most of the time they do. I believe the main reason Bernanke has pumped money into banks' electronic reserves, and I haven't read anyone else making this claim, is as an implicit threat to print more paper dollars if there were in fact a massive run on the banks. Of course, the banks could do the same by simply monetizing more of their assets and they can even counteract a Fed decision to print more money by holding the newly printed paper dollars in their vaults and not lend it out, as they're largely doing with their new stash of electronic reserves today. So private money and banks dominate under fractional-reserve banking, we just need to get rid of the small component of paper Fed notes altogether. :)
As for gold's durability or whatever, those benefits were superceded hundreds of years ago, which is why people started carrying paper money. As for alternate backing for money, I meant grandfather clocks back then, which weren't in great supply either. What specific criteria did my other suggestions for money not meet? Yes, there is a reason why gold has been used widely for money, tradition, an irrational attachment to old and outmoded ways of doing things. I guarantee that if Asians accepted gold as money during the spice trade, it was precisely because they weren't isolated and the usage of gold had already spread there from its birthplace in the middle east. In fact, if you are so attached to historical forms of money, my commodities options idea harkens back to the first uses of cowrie shells or rice or barley as money, which all predated gold. :) Whatever the reason for the supposed long-term stability of CPI in the pre-1960 period- note that CPI did double during various periods during that stretch, historical detail which is washed out by the recent ten-fold rise- I have to continue emphasizing that seeming long-term CPI stability is irrelevant in the face of highly random yearly rate swings. Our currently smooth inflation rates accompanied by massive long-term CPI rises is a much more beneficial environment for the economy, as one can bake 2-3% inflation rates into all contracts and not worry about inflation. In fact, with the advent of variable interest rate contracts and mortgages, that peg loans or other payments to market rates at any given moment, it's arguable that even interest rates don't matter anymore, except for those who still use anachronisms like the 30-year fixed-rate mortgage. ;)
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