Archive for the ‘Inflation’ Category
I’ve never dug into the published CPI reports before, but a couple of articles have raised some questions about the numerical accuracy of the recently released CPI numbers, e.g.
This type of things is right up my alley, so I decided to have a look. First of all, here is a collection of some data tabulated from the CPI report:
The published percentage change in each constituent were only given to the nearest 10 bps, so I decided to grab the actual seasonally adjusted index values and compute the percentage changes myself for more accuracy. The numbers agree well enough, so there is nothing fishy here so far.
In fact, if you take the three percentage changes for Shelter, Fuels and utilities, and Household furnishings and operatiors (highlighted in yellow) and compute the weighted sum, it agrees precisely with the percentage change in the Housing number (as it should). Explicitly,
which is precisely the number you get by looking at the percentage change in the adjusted Housing index.
So far so good…
Now, if we dig a little deeper into Fuels and utility, we find
In other words, the weighted sum of the constituents agrees with the percentage change of the adjusted Fuels and utilities index to within 2 bps. I might expect closer agreement, but there is still nothing too shocking.
Things get weird when we look at the Shelter numbers
Here we see again that the published numbers agree well with the percentage changes in the adjusted indexes, but there is something odd. If we compute the weighted sum of the constituents as we did for Fuel and utilities and Housing, we get -0.10% as opposed to -0.48% as we’d expect. This is a 38 bps different that could change a negative CPI number into a positive one.
What is going on?
There are two primary possible sources of error: 1.) the weights are wrong, 2.) the index values are wrong. I do not list percentage change of each constituent as a possible source of error because I verified these against the index values provided.
Of course, the third (and not unlikely) possible source of error is that I am misinterpreting the data. If anyone has a good explanation for this apparent discrepancy, please let me know.
Financial Armageddon points to the Reuters article:
where he argues that deflation is the next big worry. I have to humbly disagree. Sort of.
I do agree that financial asset prices are due for a massive correction, but the economy is made of more than just financial assets. Financial assets will see deflation, but physical assets will see inflation.
During the “New Economy”, financial assets have soared in value and I believe, like Jeremy Grantham, that financial assets throughout the globe have experienced a bubble.
Like I’ve said in a comment or two on Panzner’s blog, during past corrections in the financial sector, China and India were absorbing inflationary pressures. That structural shift is what will make this time different. Today, China and India are net exporters of inflation and loose monetary policy in the US will create domestic inflationary pressures that have no where to go this time.
This is the rift I saw between physical and financial assets when David Richards asked me what I thought about the markets back in December of 2006. That rift has been partially corrected with the rise in commodity and energy prices since then, but I think there is a long way to go before things are neutral. As usual, things usually will not reach a nice equilibrium and stay there. Inertia will carry it through neutral and beyond. Significantly beyond.
Ha! What did I tell you? It is wayyy past my bedtime and I should be sleeping (especially since I’m sick and feel like I’ve been run over by a truck), but just stumbled on an interesting article from one of my favorite economic development blogs: Design Nine. He points to an article in the journalgazette.net.
Recall that in the midst of all the market doom and gloom, I recently said:
I’m actually ironically optimistic about the outlook for suburban and rural economic development. A weaker dollar will make outsourcing less attractive. That will bring manufacturing jobs back home. I can imagine a boon in suburban and rural development. Just imagine if communities developed decent broadband via fiber-to-the-home/business. Suddenly, there will be attractive jobs and living standards in affordable places.
I admit that the quote is a bit misleading because Andrew Cohill has influenced the way I think about things, but still timely I think. Here is an excerpt from the article:
Onshoring, in fact, is becoming trendy.
Some U.S. companies recently have pulled back from India to set up shop in rural areas where access to high-speed broadband connections isn’t the problem it was just a few years ago and where lower real-estate prices and wages are attractive.
Note that the key to onshoring is an investment in telecommunications infrastructure. In particular, fiber-to-the-home. It is quite sad to see so many municipalities rest their hopes on wireless broadband. That will only end in tears as the reality of wireless broadband becomes apparent. Any community that is not investing now in fiber will lose out on an important opportunity that is now beginning to present itself: onshoring. As Andrew will tell you more eloquently than I could, an intelligent investment in a communities future MUST involve a combination of both fiber and wireless and I would put wireless as a distant second. I can explain in gory detail why wireless will fail if you like (I did my PhD in the subject), but for now need to hit the sack.
Go onshoring! Go USA!
Needless to say, after my comment on August 28
PS: I’ve been ignorantly harsh on both Greenspan and Bernanke, but I have to say that I am quite impressed with Bernanke’s recent performance maneuvering through the current credit crisis. I expect him to hold the target rate at 5.25% on September 18. If he does, I’ll gladly apologize for anything less-than-flattering I’ve ever said about him. If he lowers rates, I’ll lose respect and throw him back in the Greenspan “save my Wall Street buddies” bucket.
I wasn’t particularly excited about the surprise 50 bps cut in both target and discount rates for the general long-term prospects of the US economy, although on a selfish level it was certainly good for my career stability. As far as I’m concerned, it is open season for Bernanke bashing. Greenspan bashing has been accelerating as well. Besides, if things really get bad with the USD, we’ll just move to Hong Kong or something 🙂
One of the things that I learned from
Al Wojnilower was that the US economy could certainly keep chugging along for as long as the USD was the world currency. As he liked to repeat often, having the USD as the dominant world currency is like having an “American Express card with no limit”. One of the things that keeps the USD as the world’s currency is its position in sovereign reserves as well as the fact that oil is priced in USD. As far as I can see, both of these factors are beginning a worrisome decline.
With sovereign reserves continuing to diversify away from USD and Saudi Arabia refusing to cut rates in lock step with the US marks a real turn in the outlook for the USD dollar, and consequently the ability of the US economy to continue chugging along.