Tuesday, August 3, 2010

Inflation update

The personal consumption deflators have been fairly tame of late (the headline rate was slightly negative in June), but on a year-over-year basis, both the core and the headline version are registering 1.4%. That's less than I would have expected a year ago, and both are within the Fed's desired 1-2% range, so while I'm disappointed about being wrong, I'm happy that inflation so far has not been problematic.

I still think the risks are skewed to rising inflation in the future, and I still take issue with those who worry about deflation. Just as a reminder that there are a lot of prices out there that are rising, I offer the next chart, which is the CRB Spot Commodity Index; it contains no energy and many of its components are very basic items that don't have futures contracts associated with them, so speculative pressures most likely don't have a lot of influence on this index. As you can see, it has bounced nicely in the past week or so, and is very close to its recent highs. It's only 8% below its mid-2008 all-time high.

I would also note that the dollar has dropped about 9% in the past two months, which means that the average price of anything that you buy overseas has risen by 9%.


McKibbinUSA said...

Whatever path that fiscal and monetary policies eventually take, the eventual resultant is still inflation -- more at:


Deflation may be a short-term concern, but inflation will likely be the medium to long-term problem (or opportunity, depending on your point of view).

Thank you for the opportunity to comment...

Benjamin Cole said...

Well, the Fed is supposed to target 2 percent inflation, not under 2 percent. Some strict monetarists say that means the Fed has to target above-2 percent for a year or two, to bring us back to norm.
Our GDP is running about 8-10 percent under capacity. That's a lot of lost production.
This is lowest "inflation" we have seen since...well, the Great Depression.
The ever-resourceful Carpe Diem is running blogs on $20k condos in Florida and Phoenix.
Different commodities indices show different results---but any commodity that is rising is due to demand from the Far East and India, not the USA.
If Chinese and Indian demand push up gold and steel prices, that means we should rein in our economy?
If we (stupidly) institute an ethanol fuel-rural welfare program, and the boost corn prices, then we should run tight money and tank our economy?
Wheat is way up on the Russian bad harvest. So we shoud tighten money and crush our recovery?
I think the day of looking at commodities for clues is dead. We have a global economy, and free borders for flows of currency and capital. Commodities react to global influences, and the 2 billion or so people in China-India.
The only signs I see in the USA are of underused productive capacity, a fizzling recovery, and waterlogged real estate. If the the submarine real estate sector does not revive soon, say hello to Mr. Deflation--you will be getting to know him for a long time.
See Mr. Japan for an entre.

BTW, China expsneded it money supply by 25 percent, blew open the doors spending on infratructure--and they have inflation of 3 percent. The horrors! Three percent inflation. Boy, are they sorry. Of course,their GDP is rising at 10 percent a year, proof that their way doesn't work.

Benjamin Cole said...

BTW, The Goldman Sachs S&P GSCI (commodities) index is down 4 percent for the year.

Personally, I think commodities reflect yesteryear's economy, but jeez, if one is going to honk about commodities, in fact we have deflation in commodities.

4,350.70 2.31% 2.31% 8.07% -4.05%

I apologize for the above numbers, but the last figure shows the index down for 4.05 percent on the year.