Monday, June 20, 2011

MIT's BPP Monthly Inflation Rate Falls to 5-Mo. Low and TIPS Breakeven Spread Falls to A 6-Month Low

The Billion Prices Project @ MIT has just been updated with daily price data through June 1, and is reflecting moderating inflationary pressures that have fallen to a new 5-month low (see chart above of monthly inflation rates since 12/25/2010).  From a high of about 0.85% for the monthly inflation rate through late February, inflation has fallen to about 0.32% for the month ending June 1, and has been trending steadily downward for the last three months to the lowest level since late January.  

From a statement issued by the BPP @ MIT group: "We had been anticipating a slowdown in the all-items CPI, which was reflected in the BLS announcement a few days ago. The annual inflation rate appears to be stabilizing around 3.5%."

Another market indicator showing moderating inflationary pressures is the 10-year Treasury breakeven spread between yields on nominal and indexed Treasuries, which fell today to 2.17%, the lowest level since December 10, 2010 more than six months ago.  

Bottom Line: Inflationary pressures are falling. 

34 Comments:

At 6/20/2011 8:29 PM, Blogger Hans said...

Professor, the BEA owns figures show that the annual inflation rate is now annualized at 5% per year..

We are seeing an increase in the CPI and not a decline...

 
At 6/20/2011 8:34 PM, Blogger Mark J. Perry said...

Note the downward trend in the chart of the monthly inflation rate based on daily prices.

 
At 6/20/2011 8:40 PM, Blogger The High Priest said...

1) Isn't inflation defined by an increase in the total quantity of money, and not by an increase in prices (which will never all be going in the same direction)?

2) Is the claim here, then, that you can inject massive amounts of money into an economy and keep interest rates at zero without having an effect on consumer prices?

 
At 6/20/2011 9:00 PM, Blogger Rufus II said...

If the money doesn't get to the consumer the consumer can't spend it. Even gasoline prices are falling. Diesel demand is down, IIRC, 4% YOY.

Unemployment is 9.1% (and rising.)

Housing prices have fallen further than during the Great Depression.

We're sliding back into recession.

 
At 6/20/2011 9:05 PM, Blogger Rufus II said...

Small Business Creation brings you out of recession.

Small businesses are created when a would-be entrepreneur borrows money on his/her house, and takes out an SBA Loan.

No one can borrow money on a house that's underwater.

We're stuck.

 
At 6/20/2011 9:18 PM, Blogger Evergreen Libertarian said...

Rufus II that's a good point. I just did a quick check and did not see any numbers. Maybe a more detailed look will find the numbers for business starts and closing each month. Funny that we can get the housing numbers, but not the business starts and closing. I probably looked in the wrong place.

 
At 6/20/2011 9:31 PM, Blogger Rufus II said...

Maybe Ben will have to bypass the banks, and go straight to the "helicopter." :)

 
At 6/20/2011 11:07 PM, Blogger Benjamin said...

inflation is dead--the 12-month core CPI is at 1.5 percent, and that may overstate the case. And these charts show the commodities spec boom is over, and prices are headed back down.

We are below reasonable targets for inflation.

Dr. Perry is to be congratulated on not joining the gaggle of misfits, gold nuts and astrologers braying about inflation.

The real threat is that we turn into a Japan.

QE3 is a good idea.

 
At 6/21/2011 12:10 AM, Blogger PeakTrader said...

At roughly 4% nominal growth, based on core inflation, the U.S. is still below the target of 6% nominal growth:

Fed boxed in as U.S. slouches toward stagflation
June 15, 2011

In the past six months, the consumer price index has risen at a 5.1% annual rate, while core inflation has risen at a 2.1% annual rate.

By way of comparison, the CPI rose at a 3.1% annual rate in the last six months of 2010 and the core rate rose at a 0.8% rate.

Oil Prices and Inflation
October 3, 2008

Why focus on core inflation?

Fluctuations in the prices of food and energy...are not typically reflected in the underlying trend in inflation, which represents the persistent component of inflation.

In fact, over extended periods, the quantitative contribution of temporary fluctuations to the persistent component of inflation tends to disappear.

Blinder and Reis (2005)...using monthly data from 1987 to 2005 found that core inflation predicts future overall inflation better than overall inflation itself.

 
At 6/21/2011 12:18 AM, Blogger DL said...

This comment has been removed by the author.

 
At 6/21/2011 12:22 AM, Blogger DL said...

It’s not clear what the weighting of the items are in the “billion prices project”. But in any case, one of the questions is what, if anything, an investor should do with the information. For example, which will produce the best return over the next 12 months: (a) the S&P500, (b) crude oil, (c) gold, or (d) the 10 year T-note…?

My money’s on gold and oil.

 
At 6/21/2011 12:32 AM, Blogger PeakTrader said...

DL, I doubt any of those four picks "will produce the best return over the next 12 months."

You may want to look at homebuilding stocks, e.g. KBH.

The housing market peaked in 2006, and may begin a turnaround in 2012.

Of course, homebuilding stocks will rise before the upturn takes place.

 
At 6/21/2011 12:46 AM, Blogger PeakTrader said...

Markets will do what most people don't expect.

When the Fed begins the tightening cycle, the dollar may rise, and gold and oil may fall.

Conventional wisdom has been predicting, for a long time, the 10-year yield is too low. However, it remains low and fell lower recently.

The S&P 500 may be the best bet, because it may begin a third leg higher this fall.

 
At 6/21/2011 7:16 AM, Blogger Rufus II said...

You might want to keep open the possibility of a full-fledged depression.

 
At 6/21/2011 8:21 AM, Blogger morganovich said...

keep in mind that these prices leave an awful lot out.

internet prices are the most competitive in the world and have the most downward pressure.

they also leave out many of the things that are up most in price. (fuel, most food, healthcare, rent (and yes, rents are spiking in most cities)) which makes BPP understate cost increase in the consumer basket.

this metric would be better compared to core than overall CPI.

also note: the current level (even after the drop) annualizes to 4.7%.

4.7% core is hardly low inflation.

you are just falling for seasonal factors.

look at the annual inflation chart and you will see that it's so close to a 3 year high as makes no difference and has been trending up all year.

http://bpp.mit.edu/usa/

also note that the annual number is still below the number you'd get by annualizing the current number, implying that there are more increases to come.

hans is correct. the data from the BEA, the BLS, and from the trade price data are ALL unanimously showing increases in inflation.

you have cherry picked the one way to look at the MIT data that makes it look at though inflation is dropping.

looking at the trialing 365 day numbers tells a very different story, one in tune with the rest of the data.

 
At 6/21/2011 8:24 AM, Blogger morganovich said...

"Markets will do what most people don't expect.

When the Fed begins the tightening cycle, the dollar may rise, and gold and oil may fall."

isn't that what everyone expects?

"Conventional wisdom has been predicting, for a long time, the 10-year yield is too low. However, it remains low and fell lower recently."

gee, i wonder if that has to do with the fed buying 80% of the auctions?

there will be no real price signal until qe2 ends.

 
At 6/21/2011 9:44 AM, Blogger juandos said...

"You might want to keep open the possibility of a full-fledged depression"...

Indeed!

Consider the following from Investors Business Daily: Did Obama Really Prevent A Second Great Depression?

(skip)

IBD reviewed records of economic forecasts made just before Obama signed the stimulus bill into law, as well as economic data and monthly stimulus spending data from around that time, and reviews of the stimulus bill itself.

The conclusion is that in claiming to have staved off a Depression, the White House and its supporters seem to be engaging in a bit of historical revisionism.

 
At 6/21/2011 9:46 AM, Blogger PeakTrader said...

How much will inflation accelerate when this historically weak U-shaped economic recovery strengthens?

The recovery remains weak:

IMF cuts U.S. growth forecast, warns of crisis
Jun 17, 2011

Revised IMF Forecast:

"U.S. gross domestic product would grow an anemic 2.5 percent this year and 2.7 percent in 2012."

Currently, it still looks more like an L-shaped recovery based on the output gap:

http://research.stlouisfed.org/publications/mt/

Published Issue
Page 10
"Actual and Potential Real GDP" chart

 
At 6/21/2011 11:25 AM, Blogger PeakTrader said...

We may already be in a 21st century depression (and train wreck):

The Output Gap
January 19, 2011
Paul Krugman

"...there will be a $2.9 trillion gap between what the economy could produce and what it will actually produce (over four years; 2008-2009-2010-2011, based on real output)."

And the U.S. will continue to lose trillions of dollars until the output gap is closed:

Will the U.S. recover lost output and jobs?
January 12, 2011
The Levy Economics Institute

"Real GDP needs to grow at 5.2 percent (per year) from now (2011) to 2015, to achieve this result (close the output gap)."

 
At 6/21/2011 11:33 AM, Blogger PeakTrader said...

Here's part of the train wreck:

Federal spending 2007: $2.73 trillion.
Federal revenue 2007: $2.57 trillion.
Budget deficit 2007: $161 billion.

Federal spending 2011: $3.82 trillion.
Federal revenue 2011: $2.17 trillion
Budget deficit 2011: $1.65 trillion.

 
At 6/21/2011 11:58 AM, Blogger Rufus II said...

Let's review the bidding. We have several very serious problems; 4 of these are:

1) Millions of unemployed construction workers (increasing entitlement spending, lowering tax revenues.)


2) A $Billion/Day leaving the country to Import Oil.


3) Almost as much going for foreign adventures (with a significant proportion of that going to "protect" the oil.)


4) $Trillions of Corporate Profits "locked up" Overseas by inane Tax Law (resulting in a stifling of investment in the U.S.)



One possible answer: A tax credit to bring the foreign profits home for investment in One Cellulosic Ethanol Refinery in Every County.

One Stone : Four Birds

Miller Time.

 
At 6/21/2011 12:09 PM, Blogger Rufus II said...

Of course, someone would, also, have to manufacture, and transport all of the boilers, tanks, piping, sheet metal, concrete, fittings, farm equipment to raise the biomass, tractors, trucks, etc, etc.

It would be worth it just to hear all the choking sounds from Saudi Arabia, and Fox News. :)

 
At 6/21/2011 12:35 PM, Blogger DL said...

Peak Trader @ 12:32 AM


I don't necessarily disagree with you... I was just trying to keep it simple.

 
At 6/21/2011 12:38 PM, Blogger DL said...

Rufus,

"$Trillions of Corporate Profits locked up Overseas by inane Tax Law"

On this issue, Obama is only too happy to "cut off his nose to spite his face"

 
At 6/21/2011 1:13 PM, Blogger Rufus II said...

DL, I think even the most "business-unfriendly" administration in history understands that something has to be done on Corporate Taxes.

Even a moron can look at the Treasury Statement, and see that the present scheme isn't working.

 
At 6/21/2011 2:13 PM, Blogger Bernie Ecch said...

John Williams of shadowstats.com calculates inflation (as measured 30 years ago) at 11.2% and rising.

 
At 6/21/2011 4:08 PM, Blogger morganovich said...

bernie-

that number jibes well with the only other unadjusted federal numbers we currently get: import and export prices.

imports are up 12.5% from a year ago and exports are up in the mid 9's.

 
At 6/21/2011 7:14 PM, Blogger Craig said...

The idea that a "billion" prices is somehow more informative than the several hundred prices is nothing but technological conceit. There is no such thing as a "price level". Sure, we can calculate one, but what does it mean?

What is the weighted average of the prices that affect me?

That prices seem to be rising -- in general -- at all is an indictment of our current monetary system.

 
At 6/21/2011 8:20 PM, Blogger PeakTrader said...

When income rises more than prices, your standard of living improves.

Also, if you refinanced your house from above 7% to below 5%, saving over $300 a month, while paying $30 a month less for gasoline, and everything else is generally unchanged, your standard of living also improves.

 
At 6/21/2011 8:41 PM, Blogger PeakTrader said...

The BPP @ MIT group: "The annual inflation rate appears to be stabilizing around 3.5%."

Now, if we can get real growth around 3.5% too, or 7% nominal growth, a virtuous cycle of consumption-employment (where consumption generates employment and employment generates consumption, etc.) should take hold.

 
At 6/21/2011 8:47 PM, Blogger PeakTrader said...

Nominal growth and "animal spirits":

Bill Gross Jan '07:

Bloomberg's Tom Keene: "...As you know, I'm a big fan of nominal GDP - this, folks, is real GDP plus inflation. It's the 'animal spirits' that's out there. You say be careful, Bill Gross. It looks real good to me, Bill. I see 6% year-over-year nominal. You say that's going to end?"

Pimco's Bill Gross: "...Ultimately, the inflation component affects the real growth component. To the extent that you have nominal GDP - in my forecast 3 to 3.5%, that's really not enough growth in terms of the economy itself to support asset prices at existing levels. And so, declining assets prices ultimately factor into eventually lower real growth. But that's not for mid-2007 but perhaps for later in the year."

Tom Keene: "When we look at six months of low nominal GDP, is that enough to link directly into the 'animal spirits" of the business investment component of GDP - the "animal spirits" of business men and women?"

Bill Gross: "Well sure it is. When you realize that the average cost of debt in the bond market - and therefore in the economy and this includes mortgages - it is about 5.5%. If you can only grow your wealth and service that debt at 3.5% rate, then that has serious implications.

When you go back to 1965, Merrill [Lynch] did this study - in terms of asset prices during periods of time when nominal growth grew less than 4%. Risk assets have been negative in terms of their appreciation and actually bonds have done pretty well. The question becomes why hasn't that happened yet, and I think we're simply in a period of time where there are leads and lags that are much like the leads and lags of Federal Reserve policy."

 
At 6/21/2011 11:37 PM, Blogger Ron H. said...

"Of course, someone would, also, have to manufacture, and transport all of the boilers, tanks, piping, sheet metal, concrete, fittings, farm equipment to raise the biomass, tractors, trucks, etc, etc."

And, who do you think can do all that? Those millions of unemployed construction workers you complained about earlier?

"DL, I think even the most "business-unfriendly" administration in history understands that something has to be done on Corporate Taxes.

Even a moron can look at the Treasury Statement, and see that the present scheme isn't working.
"

And, what do you suggest be done?

"One possible answer: A tax credit to bring the foreign profits home for investment in One Cellulosic Ethanol Refinery in Every County."

Those profits are already home. That's why they aren't taxed in the US.

How many companies do you think are prepared to invest in an unproven idea that they have no experience in or knowledge of? Get serious.

This per county idea is just as laughable as it was the last time you suggested it. You need to think a little harder about this.

 
At 6/22/2011 8:01 AM, Blogger morganovich said...

"The idea that a "billion" prices is somehow more informative than the several hundred prices is nothing but technological conceit."

it's even a bit worse than that. online prices are, by virtue of the internet being the most competitive marketplace in the world and the easiest to price shop, the lowest anywhere and the most subject to price pressure.

this means that net inflation will always lag behind real world prices.

it also tends to overstate the relevance of products like electronics (and there is no way they have looked at the basket. a billion seconds is 33 years, so it would take man centuries to sort such a basket) and totally ignore things like healthcare, fuel, and food which are not generally bought online.

BPP is interesting, but will certainly understate price level changes and i doubt there is any way to demonstrate that it is a representative basket.

 
At 6/28/2011 3:59 PM, Blogger VangelV said...

I guess the people who should understand inflation do not agree with you Mark.

Pimco expects inflation in the developed economies, including the U.S., "to average about 3% and developing market inflation to average about 5% over the secular horizon," which is generally considered the next three to five years.

"The Goldilocks days of the '90s where nations could have strong growth and low inflation simultaneously are gone," says portfolio manager and Managing Director Mihir Worah, who outlined Pimco's thinking in a Q&A article obtained exclusively by Dow Jones Newswires....

 

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