Look Ma, No Inflation!

Friday, October 14, 2005 | 07:30 PM

from the Big Picture blog

in Economy

There is no inflation, and we's gots da data to prove it (Pay no attention to the man behind the curtain).

CPI (I cannot stop laughing, it hurts so much, please make it stop)

So let me make sure I understand this: U.S. consumer prices rose at the fastest pace in 25 years, and that is somehow a positive for the economy and/or the markets?

Puh-leeze.

Let's drill down into this nonsense before it costs too many people too much money (although Darwin might suggest that we allow the terminally dumb to starve themselves to death so as not to pass along their fool BLS-believin' genes).

1) Core commodities prices up .1%. This is taken as proof that, except for items going up in price, there is little in the way of inflation.

While that no inflation (ex-inflation) may be plausible to the naive, I interpret it very differently. To me, this means that there's little ability to pass along producer price increases to the consumer. This will inexorably lead to margin squeezes, and sure as day follows night, that will impact earnings negatively.

Commodities
5 Year Chart (no inflation here -- just rising prices)

2) Core services I:
With Housing Prices at all time highs and the affordability index at 14 year
lows, we see that "Owner Equivalent Rent" is up a mere +.1%. Need I
detail how silly this is? Home prices are up dramatically, and recently we see
that morgage rates have ticked up significantly (now over 6%).
Its no surprise that mortgage apps have dropped 3 consecutive weeks.

3) Core services II: Medical Service prices up a mere
+.3%. Anyone who has so much as a had a cavity filled knows the correlation of this tortured data to reality is approaching zero.
4) Wage Pressure: The only real bright spot in the inflation data is "Worker earnings relative to inflation. They fell, as the the Labor Department reported "real average weekly earnings of U.S. workers, adjusted for inflation, fell 1.2% in September." That marks the third consecutive monthly decline of real wages (average hourly earnings rose 0.2%).

So the only place where there is no inflation is in the pocketbooks of the consumer, whom I must remind you accounts for 70% of the economy.

(Hey
Ritholtz, any other cheery news you can bring to our attention?)

Yeah, the new
consumer bankruptcy laws take effect
Monday.

That is all . . . Source:

Consumer Price Index Summary (PDF)
BLS, SEPTEMBER 2005
http://www.bls.gov/news.release/cpi.nr0.htm

Consumer Prices Jump 1.2%; Retail Sales Advance by 0.2%
DEBORAH LAGOMARSINO and NICOLAS BRULLIARD
DOW JONES NEWSWIRES, October 14, 2005 9:15 a.m.
http://online.wsj.com/article/SB112929099168268730.html