Now, M2 (a measure of money supply in our economy) has exploded the past 8 weeks (and in theory inflation is nothing else if not a measure of money supply), and every commodity index I know of is at or near all time highs. But remember the substitution effect of this CPI report. Effectively, if you shop for steak which costs $5 a lb all your life, but due to economic hardships you have to move down to ground beef at $3 a lb, well inflation (by government measures) just fell 40% in the "meat" category. That's essentially the reasoning in this report. So as Americans get hit by the "poor effect" (opposite of wealth effect they enjoyed from their inflated houses and easy credit), our CPI report can actually potentially show falling inflation as people substitute downstream. In fact, I am hoping NEXT month we show negative inflation! That would be a hoot. I would only ask these staffers who put together this report, have to go face senior citizens on fixed income who rely on cost of living adjustments based on CPI and try to explain to them how inflation is non existent. To be a fly on that wall...
Anyhow, nevermind all that - bottom line is "inflation is contained, benign, and on the way to being slayed". And we can rally. That's all that matters. (cough) Again, my dream scenario is CPI actually falls next month! This would show the banana republic off for what it truly is.
- Led by a quirky decline in energy costs, U.S. consumer inflation moderated in February, opening the door for the Federal Reserve to keep cutting interest rates to support flagging economic growth.
- The consumer price index was flat in February, the Labor Department said Friday. Wall Street economists had expected a 0.2% increase. In addition, core prices -- which exclude volatile food and energy costs -- were also unchanged, below the 0.2% gain in retail-level inflation that economists surveyed by MarketWatch had been looking for. This was the lowest core rate since November 2006.
- Energy prices decreased 0.5% in February, the biggest drop since last August. Economists said that gasoline prices dropped at the beginning of the month when the government survey was conducted but that prices then jumped as the month progressed.
- Prices charged for medical care, always a source of higher prices because of low competition, increased a slim 0.1%.
- Transportation costs decreased 0.7% last month, with airline fares off 0.3% and prices for new cars down 0.3%.
- Electricity costs fell 0.5% in February, the biggest decline since December 2005. (???)
6 comments:
The article I read about the CPI report made me laugh. First it said no increase in fuel prices. Um, all you have to do is drive around to see that's not true. Second it said food prices went up some, but that was because of increased fuel costs. I thought fuel prices were unchanged last month? How anyone can read and write these reports with a straight face is beyond me!
hey T-Mark,
well since inflation is benign does this mean we can short gold and that commodities are due for a pull back? ;)
so what are your thoughts on how much the FED will cut next week and what is priced into the market? i was thinking they cut .50 but since theres no inflation, well they can obviously cut more.
i don't know if you've seen this but my boy Mr. Rogers was on CNBC. this guy has just been right on this entire time. i wish he had ran a mutual fund, sigh...
http://www.cnbc.com/id/23588079/site/14081545
I was thinking 50 basis points until today
now perhaps 75
feds fund futures now are giving a 40% chance of 100 basis points
sad overall
thanks for the link, I'll take a look
commodities are due for a pullback but the forced devaluation of the dollar is not allowing it.
Haha, I'm long everything when it comes to food stuffs. I don't know enough about gold to make a call, but it doesn't take a rocket scientist to figure out that the Chinese and Indians aren't suddenly going to stop eating :)
I'm sure they'll cut .50 next week. The problem is that even though Bernanke publicly says there is no inflation he has to be worried. He also has to start worrying that if he cuts next week that only leaves him with 250 bps left to play with.
Rogers is spot on. We have to let some of the overinflated wealth deflate. This means the fed should leave rates unchanged at the next meeting. Let the market do it's song and dance (correct) and then let things settle down before starting to raise rates again. The economy partied like a rockstar for years. The longer they keep pushing off the hangover, the worse it's going to be.
isn't the market pricing in or expecting .75? i thought they set up the auction window this week because they were starting to realize they couldn't cut their way out of this problem without having runaway inflation. i guess the question becomes if the FED has the "kahonas" to disappoint the market in the short term. their recent track history says no. but i believe that any decent rally in the near term has to coincide with a pull back in oil. and thats just not going to happen with the FED destroying the dollar. oil is the new currency now. i think i need to make space in my basement for a couple of barrels right next to the bullions :)
The market is pricing in 1.75% fed funds rate, with no inflation, with crude dropping back to low 80s, with a 2nd half recovery causing a huge boom in 2nd half profits, with an end to housing death spiral by this fall, with end of credit issues by this spring, with no degradation in employment, with full decoupling of foreign markets, with ability of Fed to solve everything with its magic wand aka printing press.
So let's hope all this comes true, because thats a lot of Kool aid to be pricing in and if things start not to happen as wished for, the market needs to price in the worst case scenarios.
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