Friday, July 20, 2012

No Inflationary Pressures Based on the BPP@MIT Index and Two Measures of Expected Inflation


The Billion Prices Project @ MIT just released daily online price index data through June 30, and the annual inflation rates from that price index are displayed in the chart above going back to late 2009 (red line in chart). According to this real-time measure of major inflation trends in the U.S., inflationary pressures have been subsiding for the last year, and annual inflation has fallen from almost 4% last July to the current level of about 1.25%, the lowest rate since late 2009.  In contrast to the MIT-BPP inflation, annual inflation based on the CPI is running higher, at about 1.75% through June (blue line in chart).

In one of several other related releases this week, the Federal Reserve Bank of Cleveland reported that its latest estimate of expected inflation over the next ten years was 1.26% in June, the lowest level in the 30-year history of the Cleveland Fed's series going back to 1982, except for a slightly lower estimate in May.

Further, Bloomberg is reporting that the breakeven rate on regular 10-year Treasury notes versus 10-year indexed-Treasuries, a market-based measure of expected future inflation, has been trending downward for the last three months.   The current breakeven rate is about 2.1%, indicating that the bond market expects future inflation to continue to remain low.

Taken together, these three measures above of actual and expected inflation suggest that there's very little empirical evidence of any inflationary pressures in the U.S. economy, and there's probably more evidence now of deflationary pressures.  

36 Comments:

At 7/20/2012 10:07 PM, Blogger Benjamin said...

The hysteria, and misplaced emphasis on inflation-fighting today is inexplicable. The anti-flouridation crowd has somehow seized control of monetary debates.

There was a time when Reagan Treasury Secy Don Regan said Fed powers should be shifted in the Treasury, as then-Fed chief Volcker was being "too tight." The Reaganauts wanted Volcker to ease up.

Inflation then was 4-5 percent! That was 1984.

http://news.google.com/newspapers?id=hUBVAAAAIBAJ&sjid=55QDAAAAIBAJ&pg=5524,8412282&hl=en

Today inflation is minuscule, and many (such as Don Boudreaux, the hard-core right-winger at George Mason University) say government measures of inflation are too high, due to rapidly evolving goods and services. When you can buy a very good, used computer for $30, I have to agree.

It is very important to note these inflationary measures and expectations are at record-low points after two rounds of QE. In other words, if QE causes inflation in this environment, it is an invisible variety.

 
At 7/20/2012 10:23 PM, Blogger arbitrage789 said...

Many would say that Japan has been in deflation over the last 20 years.


And yet, over the last 20 years (July 1992 to July 2012), the price of WTI crude oil, as measured in yen, has climbed more than three-fold.

The point is just that it's worth looking at different measures of inflation/deflation

 
At 7/20/2012 11:06 PM, Blogger Benjamin said...

Arb-
Japan has in fact been in deflation for the last 20 years, and Japan's economy economy, measured in yen, is smaller than it was in 1992.

The results of sustained tight money have not been what was expected. Property markets are still falling and are down 80 percent form highs, while the Nikkei Dow is off 75 percent form 1980s-early 1990s highs.

Real wages have fallen, and industrial output is off 15-20 percent in the same time frame.

The yen is way up against the dollar and other currencies.

Meanwhile, S Korea and mainland China, with expansionist monetary and government policies, have eclipsed Japan.

It is a remarkable story about how a cult-like attachment to currency or gold can wreak havoc on the real, modern economy. The Bank of Japan has badly failed the Japanese people.

 
At 7/21/2012 6:40 AM, Blogger Jon Murphy said...

Commodity prices, from metals to coal, are down (year-over-year). Even copper, which is supposed to be in a shortage is down. Although economic activity in America continues to expand, China is still slowing (official statistics put them at 7.6% growth in 2Q, but there are serious reasons to doubt that number). China is the major consumer of commodities in the world. We may see higher prices for food due to the drought, but everything from oil to consumer goods will not have any producer side price pressure until foreign demand, specifically Chinese demand, picks back up.

 
At 7/21/2012 9:49 AM, Blogger bart said...

... probably more evidence now of deflationary pressures.

Of course there is. Even John Williams SGS-CPI is trending down, and has been for many months. But it still shows *real* inflation running at over 9%.

Even the vaunted and promoted housing price bottom is showing inflation, being up around 4-6%. Same with rent.

The BLS is also showing health insurance price increases on the order of 14% YoY.

Airline fares are up about 2% YoY as of 6/1, and oil prices have not gone down since then.

BLS household insurance and car insurance are up about 3% YoY.

Food is up about 3% YoY, and the droughts won't make prices come down.

Apparel is up about 4.5% YoY



The BPP doesn't even attempt to measure service prices, can't access non-internet pricing, and services are over 50% of GDP. *sheesh!*


And all that is without taking into account *any* of the Boskin BS that avoids actual increases by asserting crud like chicken=beef, and also ignores the huge area of missing adjustments for reverse hedonics.

*yawn*

 
At 7/21/2012 9:51 AM, Blogger bart said...

For a much more accurate and valid measure of inflation, including charts etc. that prove it, see

Consumer Purchasing Power Index (CPPI)... or keep enjoying ostrich mode in the light of raw and simple and proven facts.

 
At 7/21/2012 9:53 AM, Blogger bart said...

It's my belief that Shadowstats SGS-CPI has been overstating inflation since about 2005, due to using an almost fixed adjustment to CPI-U.


CPPI vs. SGS-CPI

 
At 7/21/2012 9:59 AM, Blogger bart said...

In one of several other related releases this week, the Federal Reserve Bank of Cleveland reported that its latest estimate of expected inflation over the next ten years was 1.26% in June, the lowest level in the 30-year history of the Cleveland Fed's series going back to 1982, except for a slightly lower estimate in May.


Their track record sucks, they completely missed the huge inflation surge a few years ago.

And their Median CPI measure has gone up very significantly over the last year - from 1.6% to 2.3%.


Plus, absolutely *none* of the US major monetary aggregates are shrinking (as in they're all growing at a YoY rate well above zero). Even velocity has been level to slightly up over the last few months.

 
At 7/21/2012 10:07 AM, Blogger bart said...

Further, Bloomberg is reporting that the breakeven rate on regular 10-year Treasury notes versus 10-year indexed-Treasuries, a market-based measure of expected future inflation, has been trending downward for the last three months.

Shocking... just shocking...


The Fed spends 100s of billions in Operation Twist and rates and spreads go down? Whomever heard of such a thing?!!

And the Fed's daily Securities Lending OMO intervenes in the market to the tune of $10-15 billion and rates go down? Whomever heard of such a thing?!!


/sarc

 
At 7/21/2012 10:19 AM, Blogger morganovich said...

if you live in a cell phone and eat laptops, BPP is a great indicator, but it has zero to do with the vast majority of consumer prices.

 
At 7/21/2012 10:20 AM, Blogger morganovich said...

"
Inflation then was 4-5 percent! That was 1984."

and using the same computation, it's more like 6% now.

you are comparing apples and oranges benji.

 
At 7/21/2012 11:01 AM, Blogger bart said...

The last 6 months, CPI vs. CPPI, annual change rates

CPI CPPI
2.96% 3.99%
2.93% 6.00%
2.87% 5.85%
2.65% 5.67%
2.30% 5.33%
1.70% 4.77%

 
At 7/21/2012 12:19 PM, Blogger arbitrage789 said...

Benjamin

"a cult-like attachment to currency or gold can wreak havoc on the ...economy. The Bank of Japan has badly failed the Japanese people"
___________________

I'm not clear on what you think the BoJ should have done differently over the last 20 years (fiscal and tax policy constitutes a separate issue)

 
At 7/21/2012 2:11 PM, Blogger bart said...

A first cut (alpha) on the last 6 months of CPPI that takes taxes and deficits into account:

CPPI-X
9.12%
9.06%
8.85%
8.50%
7.05%
7.01%

 
At 7/21/2012 2:39 PM, Blogger VangelV said...

In one of several other related releases this week, the Federal Reserve Bank of Cleveland reported that its latest estimate of expected inflation over the next ten years was 1.26% in June, the lowest level in the 30-year history of the Cleveland Fed's series going back to 1982, except for a slightly lower estimate in May.

What moron would think that the inflation rate over the next ten years will be 1.26%? Don't you know that the Fed and central banks are buying treasuries because there are few private buyers or that in the absence of new money printing there would be a massive debt deflation as borrowers default in droves?

 
At 7/21/2012 2:39 PM, Blogger VangelV said...

I'm not clear on what you think the BoJ should have done differently over the last 20 years (fiscal and tax policy constitutes a separate issue)

The BoJ should have let the correction and liquidation take place rather than flood the system with liquidity.

 
At 7/21/2012 4:46 PM, Blogger Mark J. Perry said...

Over the last year:

Bread: -6.0%
Eggs: -0.8%
Milk: -6.2%
Bananas: -1.5%
Tomatoes: -4.3%
Lettuce: -13.2%

 
At 7/21/2012 5:18 PM, Blogger VangelV said...

Over the last year:

Bread: -6.0%
Eggs: -0.8%
Milk: -6.2%
Bananas: -1.5%
Tomatoes: -4.3%
Lettuce: -13.2%


I don't see reductions in bread prices in my store. In fact, I pay more. Bananas are certainly not cheaper and neither are my milk, cheese, pine nuts, almonds, walnuts, olives, olive oil, etc.

 
At 7/21/2012 6:19 PM, Blogger bart said...

I don't see reductions in bread prices in my store. In fact, I pay more. Bananas are certainly not cheaper and neither are my milk, cheese, pine nuts, almonds, walnuts, olives, olive oil, etc.


Even without any adjustments for geometric weighting or substitution bias or sampling issues, both the BLS Food and Food Away From Home measures are up almost 3% YoY.


Medical care, up 4%
Education, up 4.3%
Water, sewer, trash - up 5.5%

Energy in the various forms is down as of 6/1, but recent increases in both oil and gasoline show that's over - at least for now.

 
At 7/22/2012 11:36 AM, Blogger Buddy R Pacifico said...

VangelV stated:

"I don't see reductions in bread prices in my store. In fact, I pay more. Bananas are certainly not cheaper and neither are my milk, cheese, pine nuts, almonds, walnuts, olives, olive oil, etc."

VangelV, if I am not mistaken you live in Canada don't you? If so, then competitive price pressures are not as vigorous as in the U.S.

 
At 7/22/2012 11:43 AM, Blogger Buddy R Pacifico said...

Bart states:

"Water, sewer, trash - up 5.5%

Bart, I don't disagree but I never see this stat nor a source. Where is this from? I think it is a subtle and growing pinch in the pocketbook.

 
At 7/22/2012 12:26 PM, Blogger bart said...

Water, sewer, trash are one the categories that the BLS tracks.

Here's the link:
http://data.bls.gov/timeseries/CUSR0000SEHG

 
At 7/22/2012 12:37 PM, Blogger Buddy R Pacifico said...

bart states:

"Even velocity has been level to slightly up over the last few months."

The decline in the velocity of money might have finally stopped. That is the good news but it is at a fifty two year low. This means that liquidity of funds is at dismal lows despite the efforts of the Fed at QEs.

 
At 7/22/2012 12:44 PM, Blogger Buddy R Pacifico said...

bart,

Thanks for the water, sewer and trash chart. Great stuff. Wow, it relentlessly ascends.

 
At 7/22/2012 12:50 PM, Blogger bart said...

The decline in the velocity of money might have finally stopped. That is the good news but it is at a fifty two year low. This means that liquidity of funds is at dismal lows despite the efforts of the Fed at QEs.


Velocity being at that low a level increases the chances greatly that the move up will be explosive, as bounces off long term lows very frequently are.

The Fed has "done well" so far considering the lack of overall deflation. Even the bogus CPI has mostly been well above zero, and 1.4X since 2000 (as in inflation of 140% in about 12 years).

 
At 7/22/2012 12:51 PM, Blogger bart said...

Jon:

While I don't expect it on the very near term, even a fairly small increase in velocity will create substantial inflation.

 
At 7/22/2012 2:24 PM, Blogger VangelV said...

VangelV, if I am not mistaken you live in Canada don't you? If so, then competitive price pressures are not as vigorous as in the U.S.

You may be right. But I did not see the declines in the US Grocery stores either. The bread at Wegmans was not any cheaper this year than it was last year. The price of cheese, milk, and eggs were around the same. I just don't see how the numbers are collected in a meaningful way. The best thing to do is to look at a chain like Costco and compare the annual price changes on a per unit basis. If you do I doubt that you will see the pattern that Mark is touting because I certainly do not see it north of the border.

 
At 7/22/2012 5:17 PM, Blogger bart said...

If you do I doubt that you will see the pattern that Mark is touting because I certainly do not see it north of the border.

I don't see it in the US either, in any city that I've visited during the last 18-24 months except occasionally on non essential items.

 
At 7/22/2012 5:46 PM, Blogger VangelV said...

I don't see it in the US either, in any city that I've visited during the last 18-24 months except occasionally on non essential items.

I think that is where the confusion is. The people doing the surveys look at loss leaders designed to get people into the store and assume that is the price that the average consumer pays. But we know that is not the case. Many 'specials' are limited to a certain number of items and when they run out consumers have to wait until the next shipment. In the meantime they are buying the non-sale items in the store that the poll takers are ignoring. Add to that the packaging changes, volume changes, lower grade ingredients, more fillers, etc., and there is no way to get a clear picture of what is going on.

 
At 7/22/2012 6:45 PM, Blogger bart said...

I think that is where the confusion is. The people doing the surveys look at loss leaders designed to get people into the store and assume that is the price that the average consumer pays. But we know that is not the case. Many 'specials' are limited to a certain number of items and when they run out consumers have to wait until the next shipment. In the meantime they are buying the non-sale items in the store that the poll takers are ignoring. Add to that the packaging changes, volume changes, lower grade ingredients, more fillers, etc., and there is no way to get a clear picture of what is going on.

While no one can positively state that's true or not, the BLS does publish a lot of their methodology on how the surveys and done. I've read quite a bit of the material, and assuming the survey folk are even vaguely close to following that methodology, they do ignore sale items (or use posted non sale prices), do watch volume and packaging changes, ingredient changes, etc.

And it makes sense too. If you were intending to understate CPI, you wouldn't do it at survey level where thousands of people would see that the survey was polling the wrong, bogus or incomplete data. It would be done much higher on the chain, so it would be much more easily hidden and many fewer people would be aware of the fiddling.

That's what those "wonderful computerized economic models" (like Wall St. uses to assign non-real-world value to derivatives etc,) come into play for things like substitution bias, geometric weighting and hedonics.

It's a black box, very few actually know what it's actually doing... and "computers can't make mistakes, right?"

And most in the BLS actually think they're doing the right thing by making chicken=beef via substitution bias (on *over 60%* of the things surveyed by the CPI), and ignoring for example how much smaller airline seats are while promoting the super duper whiz bang advantages of the latest big screen TV by lowering the price reflected in the CPI that is actually charged to the consumer.

 
At 7/22/2012 6:55 PM, Blogger VangelV said...

While no one can positively state that's true or not, the BLS does publish a lot of their methodology on how the surveys and done. I've read quite a bit of the material, and assuming the survey folk are even vaguely close to following that methodology, they do ignore sale items (or use posted non sale prices), do watch volume and packaging changes, ingredient changes, etc.

But that is not possible. Everything is in flux and it takes even some careful shoppers months to figure out that their favourite products have changed from what they used to purchase before. As I have stated many times before, it is not at all possible to construct any meaningful index that would offer accurate information. The methodology may seem all right but it is very difficult to implement it consistently.

 
At 7/22/2012 7:03 PM, Blogger VangelV said...

And it makes sense too. If you were intending to understate CPI, you wouldn't do it at survey level where thousands of people would see that the survey was polling the wrong, bogus or incomplete data. It would be done much higher on the chain, so it would be much more easily hidden and many fewer people would be aware of the fiddling.

That's what those "wonderful computerized economic models" (like Wall St. uses to assign non-real-world value to derivatives etc,) come into play for things like substitution bias, geometric weighting and hedonics.


I do not dispute this angle. I am simply pointing out that the problems are evident all along the chain, not just with the people who get to tweak the models to get results that they want. One of my first jobs included auditing line positions to make sure the reported production was correct. Every once in a while I found out that the company was off by an entire wing set. Some areas were off by two or more units because they got the methodology mixed up, were sloppy, or lied outright. There was a time many years back when the EIA reported that millions of barrels that were reported in stock for months weren't really there.

I know you like to play with all of this stuff and look at all of the data. But from my own real world experience I do not see much of it as meaningful as most people think that it is over the long term.

 
At 7/22/2012 7:16 PM, Blogger bart said...

As I have stated many times before, it is not at all possible to construct any meaningful index that would offer accurate information. The methodology may seem all right but it is very difficult to implement it consistently.

As I too have stated many times before, yes it's not easy but it is possible.

But that is no reason not to try to get a best guess, nor does it provide any better methodology for measuring real loss of purchasing power than SGS-CPI or my CPPI, etc.

Additionally, the corrected CPPI (and CPI pre 1983) does track quite well over long periods of time with virtually any significant monetary aggregate that exists.



And here's the proof of how relatively tightly connected the M2 and M3 monetary aggregates are to CPI and especially CPPI since 1983.

In other words, not only does it show that CPI & CPPI are in the ballpark, but it also shows the deniers of CPI being low to be incorrect - as in it's not different this time with CPPI tracking very well like CPI did prior to the early 80s or late 60s.
M2, M3 and the CPI & CPPI tight relationship


M3, TMS and AMS ratios to gold are quite similar, although M3 tends to lead due to its inclusion of elements directly influenced by the Fed

 
At 7/22/2012 7:21 PM, Blogger bart said...

I know you like to play with all of this stuff and look at all of the data. But from my own real world experience I do not see much of it as meaningful as most people think that it is over the long term.

I won't dispute that, nothing is even vaguely close to perfect in the material universe.

I won't even dispute your use of the SGS-CPI instead of my CPPI, since we're basically on the same team.

But I will point out my last post where I showed how close the CPI and CPPI track M2 and M3 growth rates over the last century, and how it generally validates CPI & CPPI.

I also remind others of:

"Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output."
-- Milton Friedman, Nobel Prize winning economist, A Monetary History of the United States 1867-1960 (1963)

 
At 7/22/2012 7:25 PM, Blogger bart said...

(addition to last post of mine)

I also threw in the chart for TMS, AMS and M3 to gold ratios to show how similar they all are as monetary aggregates when compared to the same item,

 
At 7/22/2012 9:33 PM, Blogger VangelV said...

"Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output."
-- Milton Friedman, Nobel Prize winning economist, A Monetary History of the United States 1867-1960 (1963)


Which is why we should track the supply of money and ignore the prices. We expect periods of new technology implementation or increases in productivity to produce much lower costs. If the government and banks inflate the money supply by so much that they produce flat prices it does not mean that there is no inflation. The inflation is the increase in the money supply.

 

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