Thursday, July 15, 2010

No deflation at the producer level

The Producer Price Index fell by 0.5% in June, but that was mainly due to lower energy prices. Over the past year it is still up 2.7%. The core PPI is up 1% over the past year, and it has risen at a 2% annualized pace over the past six months, which is a definite pickup from the zero increase that occurred over the last six months of 2009.


Benjamin Cole said...

Inflation has cement shoes on. It is sitting in the back seat of car owned by Jimmy Trotorio. Near the docks.
That is the situation with inflation now.

PS Aplogies to my Italian friends, and everyone knows Italy is the most beautiful country on Earth.

McKibbinUSA said...

Of course, new unemployment claims will spike upward by 700,000 just as soon as census workers become unemployed within the coming 30-45 days or so. Yes, the unemployment news overall is grim and will likely remain so for the balance of the decade. Americans without jobs now may never work again unless they emigrate to other countries where work may or may not be more plentiful. Sorry, the unemployment outlook is horrible, frightening, and real...

Benjamin Cole said...

I have to agree, any guy who wears a tie and is unemployed and over 55 will never find work again.

That leaves 10 years to Medicare.

BTW, The Fed may move to what is called quantitative easing (QE). This is a fascinating topic, and leads me to believe that while lefties-and righties have been bashing each other over the head about the federal budget, the "real action" is what happens on QE.

It may be that the fiscal deficit is besides the point.

See this from today's NYT:

“On Wednesday, the Fed lowered its estimate of economic growth for this year, to a range of 3 to 3.5 percent, from the 3.2 percent to 3.7 percent forecast in April. Inflation has been running well below the Fed’s unofficial target of nearly 2 percent, so much so that a few officials fear that the United States is at risk of the kind of deflationary spiral that has hobbled the Japanese economy for the better part of two decades.

The Fed’s chairman, Ben S. Bernanke, has not embraced that view, but even those who disagree with it say the Fed, whose modern institutional culture was built around fighting inflation, now confronts a distinctly different problem of high joblessness.

“If federal fiscal policy is approaching its political or economic limits, some believe that the Federal Reserve should do more, including expansion of its balance sheet,” Kevin M. Warsh, a Fed governor who is close to Mr. Bernanke, said in a recent speech to the Atlanta Rotary Club. “In my view, any judgment to expand the balance sheet further,” by acquiring mortgage bonds and debt, “should be subject to strict scrutiny.”

It could be a brave new world out there.

Public Library said...

Why is it that if we become more productive, and produce more output for a given level of input, that we should expect our fiat currency to buy less of that output in the future?

Benjamin Cole said...

Public Library-

Good question. You get your wish--the PPI is down 0.5 percent in one month. That is called incipient deflation.

Your dollars buy more housing, more office buildings, more industrial space, more equity, more electronics, even more fast food than a couple years back, or even 10 years back (in the case of Dow).

How much deflation do you want? If you had cash under the mattress, you are richer than two years ago. You can buy a house or office building or retail outlet for half-price.

In some regards, the value of your greenbacks has doubled.

The big question is: If you leave those greenbacks under the mattress, do you become even richer in the year ahead?

I suspect you will. We have a do-nothing Fed.

Public Library said...

But if we are so much better at producing bread and meat today, why is the price of a hamburger above the 5 cents my grandfather paid?

Is my bread and corn today better than the bread and corn in the past?

Hedonistic pricing is voodoo magic. The past computing power relative today is not an input into the pricing equation except in theory.

We are producing more, better, and faster, but our government is depreciating the currency at an equal if not faster rate...

Public Library said...

The talk of strong dollar policy is but a distant memory in this country and global currency system.

I 100% disagree the Fed should do more. We need to purge the system of bad debts and a decade of mis-allocation. Printing more paper will only prolong the faulty investments and inevitable outcomes.

We need less Fed and less Congress so the market can vote on who should stick around.

John said...


To me it does not appear the fed is going to do anything further barring another shock of some kind. The economy is growing. Inflation is low. It is regretable unemployment is high but they can't snap their fingers and solve the issue. There are other factors.


I think we get less of the fed and congress. I hope we have gridlock soon. Business (in general and in my anecdotal experiences) hates this government. They are pessimistic and in a sour mood. Not a good environment for job seekers. I agree risk needs to be priced better. Too much government meddling generally makes things worse, not better.

BTW, congrats on your BP. They are reporting NO oil now leaking into our Gulf!

Doc McKibb,

From all I can tell, you are solidly in the majority with your pessimistic outlook. However I find it hard to swallow your opinion that unemployment will likely 'remain grim for the balance of the decade'. Maybe it will but I suspect any forcast of conditions a decade from now has more than a little chance of going wrong...

Benjamin Cole said...


You greenbacks are worth more, not less, then a couple of years back, for nearly any investment category I can think of.

Time for aggressive quantitative easing.

My favorite method would be to secretly goose winning payouts at horse tracks, but other prefer the Fed buy MBS.

Charles said...

We see in the graph a direct link between the value of the dollar and prices of goods and services. It is the more volatile elements of the index that respond immediately.

What are we to make of the flight from the euro to the dollar and the sudden turn to austerity in European fiscal policy? It will slow what is a fragile and tentative economic recovery in the US. This is a recovery that faces three huge barriers: a possible further decline in housing prices, layoffs of government workers and the Obama administration's job-destroying policies.

A case can be made for QE and I think developments in Europe tip the balance in that direction. One important dimension of our economic situation is the collapse of the shadow banking system. We can measure this through the broadest monetary aggregates like M3. And the numbers suggest that the fed has not done enough to compensate for the collapse.

No matter what the fed does, there is no quick and easy path to recovery. The economy is suffering a hangover from 10-15 years and trillions of dollars in misdirected investment. Neither housing nor the consumer nor government spending can move the economy forward. The way forward is investment for export, import substitution and cost reduction. And here the Administration's policies are standing in the way.

Benjamin Cole said...

Much to agree with--toss in huge investment in a parasitic military sector, and a 10-years long military mobilization. Sapping our economic strength every day.

Mr. Kowalski said...

"No deflation at the producer level".

There's plenty of it to go around; the M3 numbers are brutal.

But for all of the pessimism here, the real deflation bomb is in Europe. The "euribor", or the rates banks charge to loan from each other (LIBOR in Euros) is shooting skyward as banks increasingly don't trust each other, and if unchecked will reach Lehman-era levels, a VERY bad sign:

While you are right in that sovereign debt in Europe seems to be less dangerous of late, EU banks have now stepped up to the plate.

Scott Grannis said...

The Fed stopped publishing the M3 numbers because M3 has never been shown to be a good indicator of anything. Just because it is falling doesn't mean anything. Even if it is a sign of deleveraging that is no reason to think the economy is contracting. The more narrow measures of money are not scary at all. This economy is NOT suffering from a lack of liquidity.