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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.


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August 16, 2006


Not As Good As It Looks

Did we finally get that good break in the inflation news we've been waiting for?  From Reuters:

U.S. stocks gained on Wednesday as a tame increase in core consumer prices suggested that the Federal Reserve may choose to keep interest rates unchanged in the short term...

The core Consumer Price Index, excluding volatile food and energy prices, rose moderately in July and followed an unexpected drop in July core producer prices on Tuesday that sparked a rally in stocks. In another report, the pace of U.S. home building slowed more than expected in July.

Color me not quite impressed.  From the Cleveland Fed:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.4% (4.4% annualized rate) in July. The median CPI is a measure of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

In case you haven't been following along with the median, that 4.4% rate is definitely not progress. And another core measure in the spirit of the median -- the trimmed-mean CPI -- was equally bad:

   

Median_and_trimmed

   

What's going on here?  Unlike the traditional core inflation measure, which simply excludes food and energy componentsof the CPI index, the median and trimmed-mean measures exclude both high and low price changes, no matter what they might be.  The idea is to get a picture that is not distorted by items in the CPI market basket that are increasing by a lot, or decreasing by a lot.  And that picture just isn't improving that much:

   

June_july_histogram

   

While the weighted fraction of prices rising at an annual rate in excess of 5% fell, the fraction rising in excess of 3% actually went up.  And compared to the year as a whole, it is hard to feel too cheery about the pattern of price changes in July:

   

July_ytd_histogram 

   

This comes from the Wall Street Journal's sampling of business-economist's reactions to the CPI report: 

While the 0.2% outcome for the core represents a bit of a breather following four consecutive +0.3% readings, we see this as largely reflective of temporary factors as opposed to any underlying shift in the inflation story...-- Morgan Stanley Fixed Income Economics

I'd say the facts support that opinion.

August 16, 2006 in Data Releases , Inflation | Permalink

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Listed below are links to blogs that reference Not As Good As It Looks :

» Perceptions of Inflation from EclectEcon
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» Fed Watch: Finally – Some FedSpeak from Economist's View
Tim Duy with his latest Fed Watch: Finally – Some FedSpeak, by Tim Duy: Presumably, the Fed remains data dependent. Market participants, however, largely don’t see it that way. Increasingly, the view is that the Fed is done – as [Read More]

Tracked on Aug 23, 2006 4:20:30 AM

» Fed Watch: Finally – Some FedSpeak from Economist's View
Tim Duy with his latest Fed Watch: Finally – Some FedSpeak, by Tim Duy: Presumably, the Fed remains data dependent. Market participants, however, largely don’t see it that way. Increasingly, the view is that the Fed is done – as [Read More]

Tracked on Aug 23, 2006 4:23:15 AM

Comments

The figures certainly look bad. But I still wonder what the impact has been from the distortion in owners equivalent rent. OER and rents each went up 0.4% in July, so it makes sense that the median CPI also went up 0.4% because shelter is such a huge part of the CPI (about 30%).
Isn't the rise in OER also a temporary factor, just as the decline in apparel was in July? And isn't it also an inflationary factor that can't really be solved by higher rates?
The more I look at the inflation data, the more complicated it seems to get.
Good thing the markets never look deeply into the numbers....

Posted by: rex | August 17, 2006 at 12:51 PM

The figures certainly look bad. But I still wonder what the impact has been from the distortion in owners equivalent rent. OER and rents each went up 0.4% in July, so it makes sense that the median CPI also went up 0.4% because shelter is such a huge part of the CPI (about 30%).
Isn't the rise in OER also a temporary factor, just as the decline in apparel was in July? And isn't it also an inflationary factor that can't really be solved by higher rates?
The more I look at the inflation data, the more complicated it seems to get.
Good thing the markets never look deeply into the numbers....

Posted by: rex | August 17, 2006 at 12:54 PM

Dave is one of the few who cuts to the chase. And backs it up.

Well done.

Posted by: Movie Guy | August 17, 2006 at 02:48 PM

Prudent Bear's Doug Noland (08/18/06) takes issue with BMA's assessment that it "looks good":
"I read some bullish bond research this week that described real M2 as “one of the most reliable of all leading indicators,” and that it “has declined from a 9% growth rate in December of 2001 to a miniscule 1.1% expansion in the twelve months ending June, 2006.” The report continued: “To have a money/price/wage spiral develop and become entrenched in the economy, money growth must accelerate, be sustained, and lead to a speed-up of price increases across the board… This happened in the 1960s and 1970s… M2 growth averaged 7% in the 1960’s, and then accelerated to almost 10% in the 1970s… The current situation is extremely different. In the past two years, M2 growth has averaged just 4.2% per annum, a far cry from the pattern in the 1960s and 1970s, and well below the 6.6% average increase in M2 since 1900.

I’ve proffered the view that the (narrow “money”) monetary aggregates have become one of the most deceptive of all indictors. Importantly, the U.S. Financial Structure has gone through a radical transformation over the past decade, a process that has only accelerated the past few years. M2 components (chiefly currency, bank demand & savings deposits, and retail money market fund assets) have been largely trivialized by financial evolution and simply no longer capture the essence of system Credit expansion. On many levels, “Wall Street finance” has taken full command of the financial apparatus, relegating traditional monetary indicators and analysis to the status of hopelessly obsolete.

From the Bond Market Association research noted above, we see that ABS issuance “increased at average annual rates of 25-35% from 2000 to 2005.” What’s more, the “outstanding volume of money market instruments, including [non-M2] commercial paper (CP), large time deposits and bankers’ acceptances” totaled $3.15 Trillion at the end of June. There was eye-opening 17.5% growth during the past year, with nominal “money market instrument” expansion of $550 billion significantly outpacing the $300 billion y-o-y increase in M2. During the past two years, outstanding “money market instruments” inflated by over $1 Trillion, or 40%, with CP posting a two-year expansion of 34% and Large Time Deposits surging 46%. Such historic monetary expansion is completely at odds with the bullish notion of persisting disinflation.

I’ve made the case repeatedly that when analyzing pricing trends and the nature of Inflationary Manifestations one must diligently concentrate on the expansion of the broadest range of “money” and Credit instruments. With such a perspective, one can recognize the current Financial Structure as a spectacular inflationary engine, although much of this inflation has of course manifested in higher asset and commodities prices.

There are, as well, some key idiosyncrasies in today’s Financial Structure that are playing an increasingly profound role in both fashioning Economic Maladjustment and exacerbating Financial Fragility. These would include the extraordinary resiliency of both Credit growth and speculation to central bank rate increases. Below are excerpts from a few articles that recently caught my eye. They capture some of the nuance of Contemporary Wall Street Finance."

http://www.prudentbear.com/creditbubblebulletin.asp

Posted by: bailey | August 21, 2006 at 01:37 PM

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