Sunday, August 28, 2011

Three-Year Inflation Rate is Lowest in 54 Years

From the Uneasy Money blog, in response to a recent WSJ editorial defending Gov. Perry's hard money position and his criticism of Fed Chair Bernanke's record of easy money: 

"Well, let’s take a look at Mr. Bernanke’s record of currency debasement.  The Bureau of Labor Statistics announced the latest reading (for July 2011) of the consumer price index (CPI); it stood at 225.922.  Thirty-six months ago, in July 2008, the index stood at 219.133.  So over that entire three-year period, the CPI rose by a whopping 3.1% (see chart above).  

That is not an annual rate, that is the total increase over 3 years, so the average annual inflation rate over the whole period was less than 1%.  The last time that the CPI rose by as little as 3% over any 36-month period was 1958-61.  It is noteworthy that during the administration of Ronald Reagan — a kind of golden age, in the Journal‘s view, of free-market capitalism, low taxes, and sound money — there was no 36-month period in which the CPI increased by less than 8.97%, or about 3 times as fast as the CPI has risen during the quantitative-easing, money-printing, dollar-debasing orgy just presided over by Chairman Bernanke."  

MP: Actually, the CPI in July 2011 was 225.425 (not 225.922), so the three-year inflation rate through July 2011 was only 2.87% (not 3.1%), the lowest rate since January 1957, more than 54 years ago.  Although I have not seen this type of three-year inflation analysis before, I think there is some value at looking at inflation rates beyond the normal one-year time frame. This could help explain why: a) long-term interest rates like 30-year fixed rate mortgages are so low, and b) why market-based measures of inflation expectations based on the "breakeven rates" (regular minus TIPS treasury yields) have been so low.   

HT: Benjamin Cole


At 8/28/2011 11:17 PM, Blogger VangelV said...

The reported inflation rate is bogus and does not reflect the actual price increases felt by the ordinary individual who has seen his health care costs, energy, food, insurance, tuition, and other costs go up. Yes, electronics are down as they should be but the goods and services necessary for day to day living have gone up in price.

At 8/29/2011 1:35 AM, Blogger PeakTrader said...

For people who shop at 7-11, an ignorant site, e.g. StaticStats, may make sense to them.

My girlfriend and I went shopping yesterday at three stores that had many discounts and with coupons.

We bought, perhaps, at least $300 of mostly high-quality brand name items for less than $100.

And, at least over the past three years, I've seen inflation, deflation, and flat prices.

The only real price increase has been gasoline. Also, my income is much higher than three years ago.

At 8/29/2011 6:26 AM, Blogger juandos said...

Sadly Professor Mark the 'official' CPI doesn't reflect reality except maybe where PT lives...

Consider the following headline and there's little inflation calculator to play with at the same site: US Inflation Rate Continues at 3.6%, Consumer Prices Jump 0.5% in July 2011

At 8/29/2011 6:45 AM, Blogger João Marcus said...

The obsession with inflation is what´s holding the economy back!

At 8/29/2011 6:49 AM, Blogger Rufus II said...

That is an amazing chart. A real eye-opener. Thanks.

At 8/29/2011 7:08 AM, Blogger juandos said...

"The obsession with inflation is what´s holding the economy back!"...

No, I don't think so and looking at your link: “Uncertainty” doesn't lend itself in taking the worry out of inflation...

The fact is I don't think it inflation is holding the economy back, its quite something else altogether...

At 8/29/2011 7:18 AM, Blogger Methinks said...

But the Journal is oblivious to the possibility that there are circumstances in which monetary stimulus in the form of rising prices and the expectation of rising prices could be necessary to overcome persistent and debilitating entrepreneurial pessimism about future demand.

Are you kidding me? Entrepreneurs are facing more regulation and overzealous application of current regulation. There are now fewer businesses and local regulators are stepping up their actions against the remaining businesses in an effort to suck in more revenue and seem relevant. Rising costs generally have the effect of creating pessimism in entrepreneurs.

How else can one explain the steady decline in real (inflation-adjusted) interest rates over the past six months?

Why, the tax increases and the new regulation that's barreling toward entrepreneurs. Deficits are a tax increase. Furthermore, the Bush tax rate cuts are set to expire next year and Obamacare is filled not only with new expenses for business, but also a whole host of tax increases set to begin next year as well. Taxes are going way up in 2013, as are expenses associated with Dudd-Frank and Obamacare.

In light of this, I can't imagine why nobody wants to invest! Shocking!

imply laughable now that Congressional Republicans have succeeded in preserving the Bush tax cuts, preventing any new revenue-raising measures, and blocking any new regulations that were not already in place 6 months ago.

I'm in the group they're itching to raise taxes on. They'll get no new revenue. Ii have a significant amount of control over how I receive my income and I'll simply downshift (work less - finally) and increase my tax avoidance strategies by investing in tax advantaged assets. I certainly won't be taking the risk of investing in start-ups or other risky but wealth creating ventures. I've done the calculations and I can keep my current lifestyle (materially - in fact, working less, my life will be much better) on much less taxable income, but the amount of taxes I will pay will actually decrease substantially rather than increase in response to higher tax rates. History says that I'm not the only one who will be doing this. So much for "revenue increasing" measures. The only way to increase revenues is to decrease the rate and incentivize more people to engage in productive activity rather than tax avoidance.

As usual, though, leftards like this guy understands only sticks, never carrots.

And no new regulation over the past six months? Only if you're completely out of touch. Dudd-Frank and Obamacare alone represent thousands of yet to be written regulations. The SEC has hundreds of new regulatory rules, as does the FED - just to mention two regulators.

Moreover, uncertainty about what the regulatory environment will look like is not the only thing that stops people investing. Certainty that costs are rising when new regulation is revealed is just as bad. The new regulations that people already know about (the ones that have been written) are so expensive and unnecessary that they are working to stop investment.

Finally, on inflation. I don't know about this data. One way to inflate the price is to offer less product for the same price - and that's definitely happening. The TIPS spread is a lot less informative than some people think it is.

At 8/29/2011 7:31 AM, Blogger juandos said...

Well I think methinks puts his finger on one very important facet of why the economy isn't growing...

Here's an example of more potential economic damage: Court Ruling Raises Ruckus in Aircraft Industry

There's more: Economic Study Shows EPA Regulations Increase Prices, Kill Jobs

At 8/29/2011 7:50 AM, Blogger Rufus II said...

Surprisingly Strong (to me) Personal Income and Outlays Data for July

Spending Up 0.8%. Didn't see that one coming.

At 8/29/2011 7:54 AM, Blogger Rufus II said...

Core Inflation up only 0.2%.

At 8/29/2011 8:15 AM, Anonymous Anonymous said...


I think the problem is people trying to use the CPI at the individual level. Doing that would be like looking at the average weather conditions in all 50 states today to decide whether to wear a coat or take an umbrella outside. We tend to personalize data such as the CPI way too much.

At 8/29/2011 8:22 AM, Blogger morganovich said...

this is an outlandish cherry pick.

they choose a july 2008 start date, the absolute top of prices from the 2008 bubble and right before the worst recession since ww2.

the constant commodity index was 611.

4 months later, it was 322.

it's now 653.

the huge acceleration was in h2 2010. the CI was up 32% in 6 months.

pick 1/09 as a start date, and there's been quite a bit of inflation (since all the QE)

this is also a very misleading way to look at it.

they are trying to take the recession and use it to deny what's happening now, as if that fact that you drove slowly for the first hour of a trip means you were not speeding now.

try that next time you get pulled over.

"but officer, i was driving 20mph an hour ago, so if you average that with the 100 mph i'm doing now, i wasn;'t really speeding".

see if he cares.

this index is going to get dramatically worse for the next 5 months as the start date rolls forward and the 2008 data falls out of the set.

At 8/29/2011 8:50 AM, Blogger morganovich said...


you are really cherry picking data.

the PCE price index was up 0.4%. core is a meaningless metric.. do you not eat or drive or use electric light?

i realize that core and headline used to converge in the CPI series, but that has not been the case for 15 years. headline has run way ahead of core.

5% inflation is not low (even using these adulterated numbers). it's 2.5X our target.

if you got caught driving 162 MPH in a 65, that would be about equivalent.

At 8/29/2011 9:11 AM, Blogger morganovich said...

"How else can one explain the steady decline in real (inflation-adjusted) interest rates over the past six months? "

leverage and federal interference.

the fed was buying bonds. so were other entities (like china) who buy them for reasons other than return (currency manipulation)

the banks are buying them at increasing leverage. to get returns up they are just upping leverage with the blessing and encouragement of the fed.

rates are down because leverage is up from 15 to 20and 25X.

this is all part of the freddy and fannie debacle. they have taken over the whole mortgage market (70% share) the banks have little option but to lever up govvies (hey, it's tier 1 right?).

this is not an economic signal, but rather a sign that banks have been crowded out of their traditional markets by federally subsidized mortgage rates.

At 8/29/2011 11:17 AM, Blogger Rufus II said...

Morgan, you're absolutely right about the "start date" on the chart. 3 yrs is, absolutely, the wrong time span (at this time) for meaningful data.

At 8/29/2011 11:21 AM, Blogger Benjamin Cole said...

This comment has been removed by the author.

At 8/29/2011 11:24 AM, Blogger Benjamin Cole said...

I am red-faced at the hat tip,

Excellent post.

Braying about inflation has a religion for some, and thus reason has been jettisoned.

We also have monetary asceticists in our midst, who pettifog that the value of the dollar must be preserved at all costs, even if it means decades and decades of depressed output. These people are lost zealots.

Like Japan--the yen is strong baby, so who cares if Japan becomes and economic backwater? Endless deflation in asset values is not my idea of a good time.

The money-fetishists place a morality on preserving the dollar, they way I like to preserve freedom of speech. My reasons are sound, but not the obsession with nominal values.

Shadowstats is for lulus, cranks and crackpots and the UFO crowd.

At 8/29/2011 3:24 PM, Blogger PeakTrader said...

Walt, my comment reflects the general price level, and VangeIV's prices of the "ordinary individual."

At 8/29/2011 3:28 PM, Blogger Methinks said...

Endless deflation in asset values is not my idea of a good time.

I don't read most of your foolish posts, but there never has been and never will be "endless deflation". The reasons are obvious, but obviously wasted on you.

According to fools like you, debasing the currency has no ill consequences and no history of ill consequences. Tell it to Zimbabwe, Germany, Argentina, etc.

At 8/29/2011 3:45 PM, Blogger Benjamin Cole said...


Japan has suffered 20 years and counting of deflation. It must seem endless if you have been invested in Japanese stocks or real estate, both down 80 percent or so, since the Bank of Japan targeted zero inflation. The yen has been very strong. Real estate is still deflating.

As for high inflation, there are some countries where it has happened.

Much more common is modern industrialized nations that have prospered with moderate and varying inflation, such as the USA from 1980 to 2007.

Those were boom years. Indeed, when we hit deflation is when our economy tanked.

No one wants to leverage up to buy assets when deflation is lurking.

Would you?

A fetish or obsession for price stability at the expense of real economic growth is the hobgoblin idea of pettifogging bankers and senile retirees holding bonds.

Give to me boom times and some inflation over recession and deflation any day.

At 8/29/2011 5:20 PM, Blogger Methinks said...


If you looked beyond your obsession with a single factor - money printing - you'd maybe start exploring the rigidity of the Japanese economy, its huge and invasive government, and a few other factors that prevent it from growing.

Indeed, when we hit deflation is when our economy tanked.

Uh, no. We did not "hit deflation" and then the economy tanked. The bubble the Fed blew up in order to pretend we got out of the 2001 recession burst and it is the bursting of the inflation in the housing market that caused the recession. Or, more accurately, once the easy money (which was causing inflation and forcing the Fed to raise rates) stopped flowing, we were returned to reality.

You constantly conflate real economic growth and inflation. I realize that neither the tech bubble nor the housing bubble taught you anything, but inflation and real growth are not the same thing.

Printing money to inflate asset prices does not create prosperity regardless of what you think in that silly little head of yours.

At 8/29/2011 11:39 PM, Blogger Benjamin Cole said...


There is a job for you at the Bank of Japan.

And pray tell: Why did Japan hit a wall in 1990? Suddenly, the invasive measures of their federal government (or prefectures) expanded?

We can point (as did Milton Freidman to their monetary policy.

See this link, and read Milton Friedman. I respect Milton Friedman immensely, and he told the Japanese to print more money.

A foolish consistency is the hobgoblin of little minds.

Of course, printing money does not create wealth--the reaction of business and workers to more money does. As does the helpful deleveraging that accompanies higher inflation rates.

If you don't think people will work for paper money, then try waving $200 in front of hooker, and see the reaction.

At 8/30/2011 3:29 PM, Blogger Methinks said...

If you don't think people will work for paper money, then try waving $200 in front of hooker, and see the reaction.

LOL. Bunny, I try to stay away from hookers.

But, you don't seem to understand that the hooker will only take money from you because it has value. If you print it like Zimbabwe, it'll be worthless and the hooker will give you nothing but her middle finger in your face in exchange for $200.

You seem incapable of understanding this point, but that's okay. You wouldn't be you if you did.


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