Sunday, September 25, 2011

Inflationary Pressures Are Wilting: Exhibits A-E

Exhibit A: MIT's Billion Price Project is showing declining monthly rates of inflation since March (red line above), and mild price deflation for the month ending August 30, see chart above and Paul Krugman's post here.

Exhibit B: Paul Krugman also points to deflationary pressures for commodity prices - the chart above for the CRB Commodity Index shows that the commodity prices are almost 20% below the early May peak.

Exhibit C: The 10-year breakeven rate (one measure of the market's expectation of inflation based on the difference in yields between regular 10-year T-notes and inflation-indexed 10-year T-notes) has been below 2% for most of the month of September and is now at the lowest level since last October (about 1.7%), see chart above.

Exhibit D: Greg Mankiw points to the chart above showing the annual percentage change in hourly earnings, and comments:  "The slack labor market has kept growth in nominal wages low, and labor represents a large fraction of a typical firm's costs.  A persistent inflation problem is unlikely to develop until labor costs start rising significantly.  Notice in the graph above that the period of stagflation during the 1970s is well apparent in the nominal wage data.  The same thing is not happening now." 

Exhibit E: Gas prices have fallen by 12% since the early May peak, and are now at $3.52 per gallon, the lowest price since last March (see chart above). 


At 9/25/2011 10:11 AM, Blogger Ironman said...

Exhibit E: Stock prices began signaling new deflationary expectations taking hold in August.

[We'll be posting an updated version of the chart from that post tomorrow on 26 September 2011 (here's a more up-to-date version in the meantime). The deflationary expectations being built up now are linked to an expected slowdown in the performance of the U.S. economy in the second quarter of 2012.]

At 9/25/2011 10:55 AM, Blogger Buddy R Pacifico said...

According to this index commodity prices rose 28% between Aug 2010 and Aug 2011. This has to have an impact on prices rising, despite wage stagnation and some recent commodity weakness.

At 9/25/2011 4:52 PM, Blogger Benjamin Cole said...

I salute Dr. Perry for occasionally stepping outside the GOP echo-chamber, and breathing deep of the bracing fresh air.

Yes, inflation is dead, dead, dead, deader than Jimmy Hoffa.

The Fed is suffocating the economy on the misgotten notion that inflation is Satan Unmasked, and that we are suffering from inflation (we are not, obviously), or that boom-times are not a lot more important than some silly nominal figures form the BLS on prices.

Central bankers have allowed a perverted fetish about money and gold to replace sound thinking about the need for economic prosperity.

Idiotic elements on the American "right" are braying about inflation, in a daft abject manner, helping to push the economy into the perma-gloom suffered by the Japanese.

George Gilder warned of a peevish zeal in right-wing circles to place inflation fears above the goals of prosperity,. innovation and economic growth.

The Chicken Inflation Littles are a larger threat to American prosperity and security than Al Queda, by a factor of 1000 to 1.

At 9/25/2011 5:55 PM, Blogger PeakTrader said...

Inflation is low, because real growth has been slow.

However, long-term unemployment, government destruction of capital, depleting commodities, including oil, etc. will constrain real growth through inflation.

A fast recovery is more inflationary now than three years ago.

At 9/25/2011 6:22 PM, Blogger Bernie Ecch said...

"slack labor market" translates in the real world as 9.2% unemployment, 16% underemployment, 46 million people on food stamps., 3 million whose unemployment benefits have run out, 30% of manufacturing jobs exported in the last decade. But pay for the corporate system lords is up.

At 9/25/2011 6:28 PM, Blogger juandos said...

Thanks again pseudo benny for yet another emphatically stupid but still entertaining substanceless comment...

buddy beat me to the punch with his commodity price link...

Constance Hunter has the following in the EconoMonitor: Perception vs Reality – Is There Really an Inflation Worry?

At 9/26/2011 2:15 AM, Blogger PeakTrader said...

We need to encourage capitalism and entrepreneurship, e.g. through reducing risk by deregulating.

Therefore, it'll be easier to start and expand small businesses, create capital, increase the quantity and quality of goods, and reduce prices.

At 9/26/2011 8:30 AM, Blogger Luther for Liberty said...

I'll confess I've been one worried about price inflation due to Fed monetary inflation. In what way(s) is the logic at flawed? Certainly the deleveraging dollars created through TARP & Fed injections went largely to commodities and treasuries, and depressed employment is a deflationary pressure... but I'm not only seeing price inflation but feeling it too. Am I baised?

At 9/26/2011 9:48 AM, Blogger morganovich said...


the shadowstats data is pretty good. it gels pretty closely with some custom data we buy from another provider to track unmanipulated/untainted economic data.

don't listen to benji. he does not even understand the issues, much less that data.

CPI was deliberately changed to rein in COLA on social security.

they are looking to do it again.

the boskin report which was used as justification for the change does not have a single piece of of empirical data in it.

it's just assumption piled upon assumption, piled upon supposition. i would urge you to read it for yourself. it is entirely, 100% subjective.

note that they are now trying to do this again by moving to chained CPI for COLA.

if inflation is low now, then it was also low in 1976. the underlying data is doing the same thing now it did then.

there is no internally consistent way to believe that inflation was high then and low now.

if you use 70's methodology now, inflation is 9%.

if you use current methodology then, inflation was in the 3's in the 70's.

we have a ton of inflation now, and it is having pernicious effects on savings.

the BLS can pretend all it wants, but all they have done is set the scale back 20 pounds. doing so may let you claim you are skinny in your own mind, but it will not get you into your old pants.

we've had linked and worsening asset bubbles since 2000 when the fed first went insanely loose with money and undid all Volcker's good work.

we lurched from .com to consumer debt/mortgage to federal debt/fed.

this is the one from which there is no step down.

equity bubbles in productive assets are easy to clean up, debt bubbles in non productive assets are MUCH harder. a government debt bubble can be unrecoverable.

At 9/26/2011 9:53 AM, Blogger morganovich said...

is there some reason you keep cutting this post mark?

i have tried posting this twice, and it keeps failing to post.

you are misusing the BPP data. the annual figures are right at the highs. the series dips every September.

you are mistaking a seasonal pattern for disinflation. compared to a year ago, prices are rising quickly.

regarding the CRB, the exchanges just upped margin requirements.

that has drive the CRB and CI down.

it's exogenous.

jumping on that as proof of disinflation seems disingenuous given that you denied the CI's relevance as it doubled over the last 18 months.

to ignore it when it goes against you, then try to use it when it gets hit by an exogenous shock seems like pretty aggressive cherry picking.

At 9/27/2011 11:13 PM, Anonymous Anonymous said...

Isn't that pretty much par for the course on this blog, morganovich? Relentless cheerleading for markets, that is. I think Mark's generally right about pointing out all the wonderful things markets bring us, but it does seem to bleed over into some suspect issues sometimes. When times are good, he points at all the good indicators; when the economy seems to be souring, point at inflation indicators going down. ;) As much as I enjoy this blog, I have to admit the criticism that Mark is too much of a market cheerleader sometimes does stick.


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