Saturday, January 23, 2010

National Enquirer Vindicated - Pulitzer Prize Next?

WSJ -- "How the Enquirer Exposed the John Edwards Affair": The former senator might be your attorney general today if our reporters hadn't stuck with the story.

Washington Post --
John Edwards's paternity admission vindicates National Enquirer

Does the National Enquirer Deserve a Pulitzer for Breaking the John Edwards Scandal?

More on the California Real Estate Recovery

From the California Association of Realtors report for December:

· Existing, single-family home sales increased 4% in the month of December to a seasonally adjusted rate of 558,320 units on an annualized basis, from 536,846 in November. Statewide home resale activity increased 1.7% from the revised 549,190 sales pace recorded in December 2008.

· The statewide median price of an existing single-family home increased 0.8% in December to $306,820, compared with November 2009.

· For the second consecutive month, California’s median home price rose year-to-year in December, and had the largest year-to-year increase in more than three years.

· C.A.R.’s Unsold Inventory Index fell to 3.8 months in December, compared with 5.6 months in December 2008.

· The median number of days it took to sell a single-family home was 35.3 days in December 2009, compared with 46.3 days for the same period a year ago.

MP: Increasing sales + increasing median home prices + falling unsold inventory + falling median selling time = Real Estate Recovery.

Does Discrimination Explain Gender Wage Gap for Chicago MBAs? No, It's Motherhood and Marriage

From Superfreakonomics via Freakonomics blog:

The economists Marianne Bertrand (Chicago), Claudia Goldin (Harvard), and Lawrence Katz (Harvard) analyzed the gender wage-gap by analyzing the career outcomes of more than 2,000 male and female MBAs from the University of Chicago.

Their conclusion: while gender discrimination may be a minor contributor to the male-female wage differential, it is desire — or the lack thereof — that accounts for most of the wage gap. The economists identified three main factors:

1. Women have slightly lower GPAs than men and, perhaps more important, they take fewer finance courses. All else being equal, there is a strong correlation between a finance background and career earnings.

2. Over the first fifteen years of their careers, women work fewer hours than men, 52 per week versus 58. Over fifteen years, that six-hour difference adds up to six months’ less experience.

3. Women take more career interruptions than men. After ten years in the workforce, only 10% of male MBAs went for six months or more without working, compared with 40% of female MBAs.

The big issue seems to be that many women, even those with MBAs, love kids. The average female MBA with no children works only 3% fewer hours than the average male MBA. But female MBAs with children work 24% less. “The pecuniary penalties from shorter hours and any job discontinuity among MBAs are enormous,” the three economists write. “It appears that many MBA mothers, especially those with well-off spouses, decided to slow down within a few years following their first birth.”

From the abstract of the paper:

"Although male and female MBAs have nearly identical labor incomes at the outset of their career, their earnings soon diverge, with the male annual earnings advantage reaching almost 60 log points at ten to 16 years after MBA completion. We identify three proximate reasons for the large and rising gender gap in earnings: 1) differences in training prior to MBA graduation; 2) differences in career interruptions; and 3) differences in weekly hours. These three determinants can explain the bulk of gender differences in earnings across the years following MBA completion.

The presence of children is the main contributor to the lesser job experience, greater career discontinuity and shorter work hours for female MBAs. It appears that many MBA mothers, especially those with well-off spouses, decide to slow down within a few years following their first birth. The pecuniary penalties from shorter hours and any job discontinuity among MBAs are enormous."

Friday, January 22, 2010

Real Estate Recovery Continues in California

DQNews -- "An estimated 41,837 new and resale houses and condos were sold statewide last month. That was up 16.7% from 35,860 in November, and up 10.6% from 37,836 for December 2008 (see chart above). An increase in sales from November to December is normal for the season.

The median price paid for a home last month was $264,000, up 1.1% from $261,000 in November, and up 6.0% from $249,000 for December a year ago. The year-over-year increase was the second in a row, following 27 months of year-over-year decline. The median peaked at $484,000 in early 2007 and hit a low of $221,000 last April.

Of the existing homes sold last month, 41% were properties that had been foreclosed on during the past year. That was up from a revised 40.1% in November and down from 55.2% in December a year ago. It peaked at 58.8% last February."

Regional reports for California:

La Jolla, CA---"Southern California home sales in December remained above year-ago levels for the 18th consecutive month, bolstered by gains in many mid- to high-end communities. The median sale price rose year-over-year for the first time since summer 2007, reflecting a more normal distribution of sales across all price categories, a real estate information service reported.

The median paid for all Southland houses and condos sold in December was $289,000, up 1.4 percent from $285,000 in November and up 4 percent from $278,000 a year earlier. The last time the median increased year-over-year was in August 2007, when it rose 2.7 percent to $500,000, near its peak."

La Jolla, CA.----"The Bay Area housing market last month continued its step-by-step climb up from the bottom with upticks in sales as well as prices. Many of the underlying trends are shifting slowly, if at all, indicating sluggish change in market fundamentals, a real estate information service reported.

The median price paid for a Bay Area home was $380,000 in December. That was down 1.8 percent from $387,000 for the month before, and up 15.2 percent from $330,000 for December 2008. Last month was the third in a row with a year-over-year gain, after 22 months of decline. The median hit bottom at $290,000 last March, well off the $665,000 peak reached in June and July of 2007."

Huge Disparity in Income Gains for Unmarried Women vs. Unmarried Men: The "Single Gap"

USA TODAY -- "If you think women still reap more economic benefit than men do from marriage, you may be living in the past. Today, men are better off economically because their wives are, too, suggests a new study on the economics of marriage by the Pew Research Center.

It shows women's education and earnings advancements are translating into overall improvement for men. "Marriage is a different deal than it was 40 years ago," says Pew economist Richard Fry, a co-author of the study. "Typically, most wives did not work, so for economic well-being, marriage penalized guys with more mouths to feed but no extra income. Now most wives work. For guys, the economics of marriage have become much more beneficial."

Superabundance of Natural Gas Provides Promise

"Every few weeks, it seems, fresh news arrives telling of impressive discoveries of oil and gas in the Gulf of Mexico, an area that, until recently, was viewed as well worked over and unlikely to yield any new bonanzas. Last September brought word of a giant Gulf oil field reeled in by British Petroleum. And the latest Gulf headline-maker is a potentially major gas play offshore Louisiana that appears likely to add new trillions of cubic feet of gas to growing domestic reserves of the cleanest-burning carbon fuel. So much for worked over. The new take on the Gulf is decidedly more optimistic.

When coupled with discoveries of huge new reserves of natural gas across Texas, Arkansas and Louisiana, and in Colorado and Pennsylvania and West Virginia, this latest projected Gulf find makes natural gas a truly abundant fuel for this country.

In part, gas still suffers from an old misconception, left over from the first energy crisis in the 1970s, that it is scarce and that supplies are expensive and unreliable. This notion is the result of a well-remembered battle to deregulate interstate prices for natural gas. Deregulation came, of course, and the result is the superabundance of gas the nation enjoys today.

The other trouble gas has is political — it must contend with the compelling electoral arithmetic that is coal's undisputed advantage. As we saw in the 2008 presidential campaign, the electoral votes in coal-producing states make the environmentally problematic fuel irresistible to national political candidates."

Houston Chronicle editorial

More on Saving The Tiger with Market Forces

"The tiger, which is at the top of the food chain in its ecosystem, would be at the top of the economic ladder because of its market value. Among the results we can expect from breeding tigers to reduce poaching in the wild:

•The pressure on wild tigers will go down, attracting more tourists to sanctuaries to see this majestic animal in its natural setting.

•The sale of farmed tigers will reduce the incentive for smugglers to kill wild tigers.

•Scientists and wildlife managers will improve their breeding, management, and rehabilitation methods for tiger reintroduction; forest dwellers, who have detailed knowledge of their natural surroundings, will facilitate wildlife management.

•Rural populations will change their incentives. Villagers who are often lured by smugglers into killing a wild tiger for a few dollars, will now defend their new environmental assets, because a live tiger will be more profitable to them than a dead one.

•In addition to attracting tourists through reduced pressure on wildlife, the farms can attract sportsmen through selective allocation of hunting licenses.

•As trade and marketing channels develop for both consumptive and non-consumptive use of tigers, investment in better technologies and management practices will take place. National and international brands will appear. Tourism will increase.

The price of the tiger in the black market will collapse, and legal trade will thrive. Investment will improve the productivity of wildlife farms, and assured supply and low prices will take the pressure off the wild tigers, allowing their numbers to revive.

Nothing would help the tiger and the other resources of our forests more than giving forest dwellers a stake in the resources in their vicinity and the opportunity to make a profit from them. A legal framework for tiger breeding would help resolve the conflict between the people and animals that has contributed to the tiger’s drastic decline. Once people can profit from these resources, they will have the incentive to optimize the use of the resources. It is mostly forgotten that forest and wildlife, including tigers, are renewable.

Under such a framework, rather than being in conflict, humans and animals would both prosper. Commerce could be the most powerful ally of conservation."

~From Barun Mitra's article "
Saving the Tiger" for PERC

Thursday, January 21, 2010

Markets in Everything: Human Bed Warmers

LONDON (Reuters) - "International hotel chain Holiday Inn is offering a trial human bed-warming service at three hotels in Britain this month. If requested, a willing staff-member at two of the chain's London hotels and one in the northern English city of Manchester will dress in an all-in-one fleece sleeper suit before slipping between the sheets.

"The new Holiday Inn bed warmers service is a bit like having a giant hot water bottle in your bed," Holiday Inn spokeswoman Jane Bednall said in an emailed statement to Reuters. The bed-warmer is equipped with a thermometer to measure the bed's required temperature of 20 degrees Celsius (68 Fahrenheit).

Holiday Inn said the warmer would be fully dressed and leave the bed before the guest occupied it. They could not confirm if the warmer would shower first, but said hair would be covered."

HT: Sean X. Murhphy

Australia.... A Big Country

Strange Maps.

Dec. Leading Economic Index Hits Record High; First Time Since 2004 of 9 Consecutive Increases

WASHINGTON, Jan 21 (Reuters) - "A gauge of the U.S. economy's prospects rose for the ninth straight month to a record high in December, a private research group said on Thursday, indicating a recovery was set to pick up. The Conference Board said its index of leading economic indicators rose 1.1 percent to an all-time high of 106.4 last month.

Analysts forecast that the index would rise 0.7 percent, according to a poll by Reuters. "The leading economic index suggests that the pace of improvement could pick up this spring," said Ken Goldstein, an economist at the Conference Board."

MP: The Leading Index's ninth monthly increase from April to December 2009 is the first time since mid-2004 that the Leading Index has increased that many months in a row.

Following 19 Weekly Declines, Jobless Claims Rise

WSJ -- "The number of U.S. workers filing new claims for jobless benefits unexpectedly rose last week -- an increase a U.S. Labor Department economist said is partly due to an administrative backlog in processing claims. Total claims lasting more than one week, meanwhile, declined.

The four-week moving average, which aims to smooth volatility in the data, also increased as well last week. The Labor Department said the four-week moving average increased by 7,000 to 448,250 from the previous week's revised average of 441,250 (see chart above). An economist at the U.S. Labor Department Thursday said last week's numbers were higher then expected in part because the Christmas and New Years holidays created a backlog in some states. "It is not an economic thing -- it is an administrative thing," he said."

MP: Following nineteen consecutive weekly declines in jobless claims, the 4-week average rose last week for the first since last August. As the Labor Department report suggests, it might be more of an "administrative" factor than any significant reversal of the downward trend since March.

The Market Saved the Alligator from Extinction

Case Study: In 1967, the American alligator was listed as an endangered species (under a law that preceded the Endangered Species Act of 1973), meaning it was considered in danger of extinction throughout all or a significant portion of its range. American alligators were depleted from many parts of their range as a result of hunting and loss of habitat, and 30 years ago many people believed this unique reptile would never recover.

However, the creation of large, commercial alligator farms contributed significantly to saving alligators in the U.S.. Alligator farming is a big and growing industry in Georgia, Florida, Texas and Louisiana, and these states produce a combined annual total of some 45,000 alligator hides. Alligator hides sell for about $300 each, though the price can fluctuate considerably from year to year. The market for alligator meat is growing and approximately 300,000 pounds of meat is produced annually.

Today, in just the state of Louisiana, there are 723,000 alligators on alligator farms, and biologists estimate Florida has 2 million wild alligators. In fact, there are so many wild alligators in Florida that state officials have lifted the ban on alligator hunting, and they now have an 11-week hunting season each year. The American alligator was removed from the endangered species list in 1987 after the U.S. Fish and Wildlife Service pronounced a complete recovery of the species.

Bottom Line: Private property rights, commercial farming, and the commercial sale of alligator meat and hides was largely responsible for the full recovery of the American alligator and helped save it from extinction. The same approach could help save tigers (see recent
CD post), elephants and rhinos, or any other endangered species.

Tiger Shortage? Not if Markets Are Allowed to Work

"The Telegraph reports that there are now fewer than 50 wild tigers left in China. The selling of tiger parts has been banned for many decades, yet tiger numbers continue to fall. The policy fails yet many persist in defending it.

There is a market solution: the commercial farming of tigers."

~JP Floru on the Adam Smith blog

Wednesday, January 20, 2010

LA Port Shipping: 2009 Ends Strong on Exports

SAN PEDRO, Calif. — "The total number of containers shipped through the Port of Los Angeles in December increased slightly compared to the previous year, giving December numbers the only year-over-year monthly increase of the entire calendar year (see top chart above). The volume of loaded outbound containers in December also continued to climb, fueling more speculation that the international container trade will start to recover in 2010.

The total number of Twenty-Foot Equivalent (20-foot containers or “TEUs”) imported and exported through the Port of Los Angeles in December was 562,990, a 0.35% increase compared to 561,033 TEUs in December 2008. Loaded container exports were up a whopping 40.23% at 153,836 TEUs compared to 109,704 TEUs in December 2008 (see bottom chart above)."

MP: The year-over-year percentage shipping increase for the L.A. Port in December reached a 16-month high, the highest since August 2008. Likewise, export volume from the L.A. Port reached a 16-month high in December of 153,836 TEUs, the highest monthly export volume since August of 2008.

Colombia Tariff Ticker

Days since U.S.-Colombia Free Trade Agreement (FTA) signed (the FTA awaits Congressional approval): 1,156

Estimated tariffs imposed on U.S. exports to Colombia since the FTA was signed in late 2006 (the FTA would eliminate tariffs): $2,500,046,000

Source: Latin America Trade Coalition

From 67.5% to 58% in 3 Days

Intrade odds for the contract "The Democrats to control the House of Representatives after 2010 Congressional Elections."

Blessing in Disguise for Obama? Maybe, Maybe Not

"Politically, ObamaCare has backfired. Much of the goodwill with which the president entered the White House has been squandered, and any effort to try to force a health bill through Congress now will drive what’s left of that goodwill over a cliff.

But Brown and the voters of Massachusetts have killed ObamaCare. In so doing they have provided the president a priceless second chance to adjust his political course, move toward the center, and deliver at least some of the bipartisan cooperation that was at the heart of his once-enormous appeal. If Obama seizes the opportunity that Massachusetts and its senator-elect have given him, the brightest days of his presidency may be still to come."

~Jeff Jacoby

United Van Lines Releases Annual Migration Study

The map above shows U.S. migration patterns in 2009, according to United Van Lines annual study of shipment patterns.

See related WSJ editorial here, "
The Great D.C. Migration: Americans move to where your money is."

Chart of the Day: Same Island, 7X Difference in GDP

I first thought this huge difference in per-capita GDP between Dominican Republic and Haiti could be explained by the difference in economic freedom, but according to the Cato Economic Freedom of the World report, Haiti (#94) actually ranks just slightly ahead of the Dominican Republic (#95) for economic freedom.

If that doesn't explain it, what does?

Update: The
Heritage Foundation/WSJ 2010 Index of Economic Freedom was released today (h/t to Steve in the comments), and the Dominican Republic ranks #86 vs. #141 for Haiti. Haiti ranks especially low for Property Rights (score of 10 out of 100 vs. 30 for Dominican Republic) and Corruption (14 out of 100 vs. 30 for D.R.).

Interesting Fact of the Day

"Since 1933, Republicans had a more positive record on civil rights in Congress than the Democrats. In the twenty-six major civil rights votes since 1933, a majority of Democrats opposed civil rights legislation in over 80 percent of the votes. By contrast, the Republican majority favored civil rights in over 96 percent of the votes."

Source: Dirksen Congressional Center

HT: Jarod Wachtel

EU vs. USA, Part V

The chart above shows real GDP per capita from 1969 to 2009 for the EU-15 and the USA, using data from the USDA. The chart below displays the difference in real GDP per capita between the USA and the EU-15 over the same period, and shows that the USA-EU difference has more than doubled, from $4,000 as recently as 1982 to more than $8,000 by 1999, and has been as high as $8,794 in 2005. For 2009, the difference in per capita real GDP was $8,236 (US $41,646 - EU $33,410).

Data HT: Ironman

Olbermann Cries Racism in Massachusetts Uprising

HT: R Adams

Then vs. Now: The Way Things Used to Be

1972 presidential election: Nixon won a majority vote in 49 states (including McGovern's home state of South Dakota), with only Massachusetts and the District of Columbia voting for the challenger George McGovern.

Tuesday, January 19, 2010

2009 Global Bull Market Rally: World Stock Markets Gain 43% and $14 Trillion in Market Value

The value of world stock markets increased by $1.07 trillion in December (data here) to $46.5 trillion, the highest level for total world stock market capitalization since August 2008 (see chart above). The world's stock markets have increased in value nine out of the last ten months, and world markets have gained $14 trillion in market capitalization since the $28.7 trillion value in December 2009, representing almost a 43% increase this year.

In 2009, 48 out of the 52 stock markets tracked by the World Federation of Exchanges registered positive gains in market capitalization (all except Bermuda, Japan's JASDAQ and Osaka exchanges, and Jordan), and some stock markets have more than doubled in market value since December 2008 including Brazil (+126%), India (+102%), Indonesia (+117%), and China (+145%).

In the U.S., the NASDAQ gained 44% in market capitalization, and the NYSE gained 28.5%, representing a $3.6 trillion increase.

Ballot: Special Election for United States Senator

4-Block World.

Consumer Confidence Returns to Pre-Crisis Level

NEW YORK, January 14, 2010 — "After declining throughout much of 2009, American consumer confidence improved sharply this month, returning to levels not seen since the financial crisis began in September 2008, according to the most recent results of the RBC CASH (Consumer Attitudes and Spending by Household) Index. Driven by the largest-single-month gain in expectations for jobs since the inception of the Index eight years ago, the RBC Index for January 2010 stands at 58.3, up 19.3 points from its December 2009 reading of 39.0."

“This month’s RBC Index has risen to levels not seen since the financial crisis hit with full force,” said RBC Capital Markets U.S. economist Tom Porcelli. “The latest increase seems to be based on the recent string of positive economic news. This bodes well for continued improvement in consumer confidence, which will be crucial to economic recovery.”

Intrade Odds for MASS: From 10% to 77% in 8 Days

Intrade contract for MA special election.

Monday, January 18, 2010

Economic Recovery Gathers Momentum: Car Production Set to Crank Up 69% in Q1 2010

DETROIT FREE PRESS -- After a long spell of cutting production and closing plants, North American automakers are preparing to build substantially more cars as evidence mounts that the economic recovery is gathering momentum.

Collectively, the industry plans to make 2.93 million cars and trucks in North America between Jan. 1 and March 31, according to Ward’s AutoInfoBank, up 69% from 1.73 million built in the first three months of 2009 (see chart above). That’s still less than the 3.58 million vehicles assembled in the first quarter of 2008, but it is still some of the first tangible evidence the long-anticipated recovery is real.

“Despite problems we might still be having in the labor market, these planned output increases do reflect belief that we will see a significant rebound,” said Mark Perry, an economics and finance professor at the University of Michigan in Flint.

Economic data supports the notion that the battered manufacturing sector is beginning to heal. Industrial production increased for the sixth consecutive month in December. The measurement’s 4.5% growth rate for the six months ended Dec. 31, marked the largest six-month gain since early 1998, according to the Federal Reserve. Manufacturing overtime hours averaged 3.4 hours per worker in November and December, according to the Bureau of Labor Statistics, the highest since October 2008.

“The industry expects last year’s hibernation to end,” said industry analyst Sean McAlinden. “The bear will stick his nose out of the tent.”

Big Slide for Big 3 Market Share: From 90% to 45%

According to data from Ward's Automotive, the Big Three's (GM + Ford + Chrysler) market share for the U.S. went from above 90% in 1965 to below 45% in 2009. Also from Ward's, below are the top 10 best selling cars in the U.S. for 2009 (trucks not included), and then the top 20 cars and trucks for 2009.

Landslide? Brown With 15 Point Lead (Bellwether)

According to bellwether polling conducted Saturday, Jan. 16, and Sunday, Jan. 17 by Suffolk University:

Brown (55%) leads Coakley (40%) by 15 points in Gardner. Independent candidate Joseph L. Kennedy polls 2%, while 3% are undecided.

In Fitchburg, Brown (55%) has a 14-point lead over Coakley (41%), with 2% for Kennedy and 2% undecided.

Peabody voters give Brown (57%), a 17-point lead over Coakley (40%), with Kennedy polling 1% and 3% undecided.

The bellwether polls are designed to predict outcomes and not margins. Suffolk's bellwether polls have been 96% accurate in picking straight-up winners when taken within three days of an election since 2006.


Sunday, January 17, 2010

Intrade Odds for Scott Brown to Win MASS: 70%

Intrade (click on "Last Day" for most recent trading).

Interview with Eugene Fama

Excerpts from the New Yorker interview with Eugene Fama:

Many people would argue that, in this case, the inefficiency was primarily in the credit markets, not the stock market—that there was a credit bubble that inflated and ultimately burst.

I don’t even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.

Maybe you can convince me there can be bubbles in individual securities. It’s a tougher story to tell me there’s a bubble in a whole sector of the market, if there isn’t something artificial going on. When you start telling me there’s a bubble in all markets, I don’t even know what that means. Now we are talking about saving equals investment. You are basically telling me people are saving too much, and I don’t know what to make of that.

Is it not true that in the credit markets people were getting loans, especially home loans, which they shouldn’t have been getting?

That was government policy; that was not a failure of the market. The government decided that it wanted to expand home ownership. Fannie Mae and Freddie Mac were instructed to buy lower grade mortgages.

So what caused the recession if it wasn’t the financial crisis?

(Laughs) That’s where economics has always broken down. We don’t know what causes recessions. Now, I’m not a macroeconomist so I don’t feel bad about that. (Laughs again.) We’ve never known. Debates go on to this day about what caused the Great Depression. Economics is not very good at explaining swings in economic activity.

The experiment we never ran is, suppose the government stepped aside and let these institutions fail. How long would it have taken to have unscrambled everything and figured everything out? My guess is that we are talking a week or two. But the problems that were generated by the government stepping in—those are going to be with us for the foreseeable future. Now, maybe it would have been horrendous if the government didn’t step in, but we’ll never know. I think we could have figured it out in a week or two.

What lessons have you learned from what happened?

Well, I think the big sobering thing is that maybe economists, like the population as a whole, got lulled into thinking that events this large couldn’t happen any more—that a recession this big couldn’t happen any more. There’ll be a lot of work trying to figure out what happened and why it happened, but we’ve been doing that with the Great Depression since it happened, and we haven’t really got to the bottom of that. So I don’t intend to pursue that. I used to do macroeconomics, but I gave (it) up long ago.

Thanks very much. Finally, before I go, what about Paul Krugman’s recent piece in the New York Times Magazine, in which he attacked Chicago economics and the efficient markets hypothesis. What did you think of it?

(Laughs) My attitude is this: if you are getting attacked by Krugman, you must be doing something right.

HT: David L. Prychitko

Bond Market Investors Remain Inflation Skeptics

Greg Mankiw writes about inflation in the NY Times:

"Is galloping inflation around the corner? Without doubt, the United States is exhibiting some of the classic precursors to out-of-control inflation. But a deeper look suggests that the story is not so simple."

Mankiw ends with this somewhat non-committal conclusion:

"Investors snapping up 30-year Treasury bonds paying less than 5 percent are betting that the Fed will keep these inflation risks in check. They are probably right. But because current monetary and fiscal policy is so far outside the bounds of historical norms, it’s hard for anyone to be sure. A decade from now, we may look back at today’s bond market as the irrational exuberance of this era."

MP: The top chart shows 10-year yields on Treasury notes back to the mid-1950s, and like the current 30-year yields that Mankiw mentions, are not showing the classic, inflation-inflated high nominal bond yields of the late 1970s and early 1980s that reflected both: a) high actual inflation, and b) rising expectations of future inflation. The bottom chart shows that annual M2 money supply growth just fell to 1.9% in early January, the first time since mid-1995 that M2 growth has been below 2%. Like the bond market investors (and maybe Mankiw?), I'm still an inflation skeptic.

Median CPI Falls 15th Month to Record Low Level

According to a report released Friday by the Federal Reserve Bank of Cleveland, the median Consumer Price Index was virtually unchanged at 0.0% (0.6% annualized rate) in December. The "median CPI" is a measure of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.

Earlier Friday, the BLS reported that the seasonally adjusted CPI for all urban consumers was increased 0.1% (1.6% annualized rate) in December. The CPI less food and energy increased 0.1% (1.4% annualized rate) in December on a seasonally adjusted basis. Over the last 12 months, median CPI inflation was 1.20% compared to CPI inflation of 2.70% (see chart above).

According to the Cleveland Fed:

"Federal Reserve policymakers are always on the lookout for inflation (i.e., a general increase in prices), and they use a variety of measures to gauge inflation trends. One such measure is the Consumer Price Index (CPI) published by the BLS.

The CPI measures changes in the prices of a number of goods and services—things like gas, rent, groceries, and clothing. However, the prices of some of these items—such as food and energy—are volatile; they can change a lot from month to month, based on supply and demand. So the BLS also publishes a measure of “core” prices that excludes food and energy prices. Researchers at the Federal Reserve Bank of Cleveland and Ohio State University devised a different way to get a “core CPI” measure—or a measure of underlying inflation trends. It’s called the Median CPI.

To calculate the median CPI, the Federal Reserve Bank of Cleveland looks at the prices of the goods and services published by the BLS. But instead of calculating a weighted average of all of the prices, as the BLS does, the Cleveland Fed looks at the median price change—or the price change that’s right in the middle of the long list of all of the price changes. According to research from the Cleveland Fed, the median CPI provides a better signal of the inflation trend than either the all-items CPI or the CPI excluding food and energy." (emphasis added)

MP: 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, the decrease in December's median CPI to 1.24% from 1.30% in November was the 15th consecutive monthly drop in median CPI inflation, and the lowest year-to-year inflation rate in the history of the Cleveland Fed's series back to 1984 (historical data here). Therefore, it would seem that a stronger case could be made for deflation right now, than the case for inflation.