Monday, February 21, 2011

Intrade Introduces Inflation Futures Contracts

Inflation has been getting lots of attention lately.  For example, do a Google News search for terms like "rising inflation," "inflationary pressures" or "rising food prices" and you'll find almost 3,000 results each.  Interestingly, you'll get about the same number of results for the word "deflation."  

According to the most recent WSJ Economic Forecasting Survey, the consensus of more than 50 economists and analysts is that CPI inflation will be 2.1% in December 2011.  But with all of the talk lately about rising food and commodity prices, there are many guests on CNBC, Bloomberg, and FOX Business News who think the inflationary pressures will push the rate up much higher than 2.1% by the end of the year.  

With all of the incredible divergence of opinions about future inflation, it seemed natural for Intrade to introduce inflation futures contracts, and that's exactly what just happened following my suggestion to them.  Here's the link to the six new futures contracts that allow you to take a position on the U.S. inflation rate in December 2011, based on the 12-month percentage change in the CPI-U.  

20 Comments:

At 2/21/2011 2:21 PM, Blogger morganovich said...

mark-

those are not contracts on inflation.

those are contracts on CPI-U.

many of us to not believe those to be the same thing.

 
At 2/21/2011 3:03 PM, Blogger juandos said...

Betting on inflation now seems a bit silly if one takes into account the new instability in the mideast and how that's going to affect energy prices...

From the Washington Times: Inflation makes comeback as prices rise for food, fuel...

From CNBC: Philly Fed Index Hits 7-Year High as Inflation Builds

 
At 2/21/2011 3:12 PM, Blogger PeakTrader said...

Consumer behavior has a significant impact on inflation.

When the price of a good rises relative to a similar good, consumers tend to substitute the lower priced good for the higher priced good.

So, the actual inflation rate is lower than what a static model would show.

 
At 2/21/2011 3:48 PM, Blogger PeakTrader said...

Also, I may add, who's better off?

China's per capita real income rising from $500 to $3,000, while U.S. per capita real income rising from $15,000 to $45,000 over the same period?

China gained 500%, while the U.S. gained 200%.

Or, China gained $2,500, while the U.S. gained $30,000.

 
At 2/21/2011 4:12 PM, Blogger juandos said...

Who is better off PT in terms of "real' purchasing power?

 
At 2/21/2011 4:32 PM, Blogger Buddy R Pacifico said...

This comment has been removed by the author.

 
At 2/21/2011 4:34 PM, Blogger Buddy R Pacifico said...

Ironically, I am working today on 3% price increase announcements to my customers, effective 4-1. Most of the cost increases, that I am partially passing on, are increased local and state government taxes and fees.

 
At 2/21/2011 5:41 PM, Blogger PeakTrader said...

Juandos, in order:

1. U.S. consumers.
2. China's communist elites or middle class.
3. Everyone else in China, i.e. the masses.

 
At 2/21/2011 5:46 PM, Blogger juandos said...

O.K. thanks PT...

I sort of thought that might be the case but wasn't really sure...

 
At 2/21/2011 6:39 PM, Blogger morganovich said...

peak-

"When the price of a good rises relative to a similar good, consumers tend to substitute the lower priced good for the higher priced good. "

no. this is precisely the wrongheaded rationale that makes CPI understate inflation.

if consumers shift away from a higher priced good and to a lower priced one, the price of the former should drop and the latter should rise.

thus, all of that signal is already contained in price.

it also assumes that all price changes are driven by supply, an wildly inaccurate notion.

if the atkins diet gains popularity, the price of meat increases and the price of pasta drops (as actually happened) but, far from encouraging consumers to eat more spaghetti, it is rather a reflection of the fact that they are eating less. thus, overwighting it in a hypothetical consumption basket is 180 degrees wrong. the whole reason it got cheaper is that demand dropped for a reason not related to price.

you don't substitute bell bottom jeans for straight leg because they are cheaper, they are cheap because they went out of style.

so, as you say, consumer behavior has a big effect on price, but more often that not, price increases are due to demand going up or down and as such, quantity consumed adjusts in the opposite direction of what you propose.

 
At 2/21/2011 6:41 PM, Blogger Benjamin said...

I am buying low quality paint brushes for less than I paid 10 years ago. Industrial rents in SoCal are lower than 10 years ago. House prices are less than five years ago.

Unit labor coasts have been declining at about a 2 percent annual rate in the USA for the last two years.

Looking at commodities may scare some, but remember higher commodity prices tend to result in gluts. I wonder if oil can maintain at $90. Demand flatlines at that price, while most majors start production at $40 a barrel. The marginal cost of production on oil is usually under $10 a barrel.

Gold is worth whatever merging upper classes in India and China say it is worth. That is where the bulk of today's gold is sold.

I expect years of low inflation, and interest rates near zero bound. The world has a glut of capital.

 
At 2/21/2011 9:11 PM, Blogger Benjamin said...

BLS reports unit labor costs fell 1.5 percent in 2010, and 1.6 percent in 2009.

Unit labor costs are down 3 percent in the last 2 years.

How do we get inflation, when labor is 60-70 percent of costs, and commercial rents are falling too?

 
At 2/21/2011 9:12 PM, Blogger Benjamin said...

Buddy-

What business, what region? Most people I know are cutting prices, not raising them.

 
At 2/21/2011 9:57 PM, Blogger Buddy R Pacifico said...

Benji, the hardest thing for me to do in the last ten years is raise prices. I am taking a risk but I can't absorb any more costs without some revenue increases. I cut prices in 2001 and have been trying to get back to those levels. Business: commercial property rentals (small player).

 
At 2/21/2011 11:43 PM, Blogger Benjamin said...

Buddy-
Yeah, I rent out some space in my warehouse. Rents are down. I had to cut space into smaller units, break out new space, etc. just to stay above water.

Sheesh, I put a trailer on the parking lot and rent that out too. You might want to try that. I live in another trailer.

I see no inflation.

 
At 2/22/2011 3:26 AM, Blogger PeakTrader said...

Morganovich says: "If consumers shift away from a higher priced good and to a lower priced one, the price of the former should drop and the latter should rise."

If or until that happens, consumers are actually buying goods at lower prices.

There are many factors that lower prices, e.g. increased productivity, lower costs, more trade, etc.

Competition often results not only in lower prices, but depressed prices.

 
At 2/22/2011 4:38 AM, Blogger PeakTrader said...

Also, your examples of Atkins diet and bell bottom jeans have more to do with quality perceptions and discontinued goods than normal consumer behavior.

 
At 2/22/2011 4:11 PM, Blogger Ron H. said...

Peak

"Also, your examples of Atkins diet and bell bottom jeans have more to do with quality perceptions and discontinued goods than normal consumer behavior."

What exactly IS normal consumer behavior? Those two examples seem typical of behavioral changes that happen continually.

 
At 2/22/2011 4:59 PM, Blogger PeakTrader said...

Ron, "typical" consumer behavior is when you see a bargain, you're more likely to buy, and when you see a great bargain, you're more likely to stock-up, given your budget constraint.

 
At 2/23/2011 10:15 AM, Blogger VangelV said...

What we have is betting on a number that will be reported, not on inflation.

 

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