Forbes Article:A Deflation Alert Hidden in the Latest CPI Indicators

23 comments

• Mate27

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  a year ago

  And more text from the Forbes article (yes SkiDumb will think it’s an Apple News article) Fed was late in detecting inflation, and it will be late to respond to the end of the cycle. This risks feeding a pro-cyclical impetus into the real economy’s slowdown and, potentially, bringing on the recession that many fear. Let’s do the numbers. Too Many Metrics The first problem is — there are too many numbers to choose from. To start with, every month the federal government publishes two “headline” inflation numbers. The Bureau of Labor Statistics (a branch of the Depart of Labor) releases the Consumer Price Index (CPI) typically around the 12th of the month, and the Bureau of Economic Analysis (part of the Department of Commerce) publishes the Personal Consumption Expenditure Index (PCE) about two weeks later.
• Mate27

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  a year ago

  PCE vs CPI (Rickyboy’s argument flies in his face) The PCE vs the CPI The confusion begins with the two headline figures. The CPI and the PCE are designed to measure the same thing, so one should expect they will generally agree. Until Q2 2021 – when our inflation outbreak really got going – they did agree. But since then, they have diverged significantly. The long term “gap” between the two metrics had been small (the CPI was less than 2/10ths of a percent higher). But as inflation has accelerated, the gap has widened by a factor of 8. This is troubling. If two bathroom scales give different answers, but the difference is small and consistent, we accept it as an ordinary variation in the manufacture or calibration of the two mechanisms. But if one scale starts producing answers that differ by a large and growing amount from the other, the conclusion must be that there is something wrong with one or both of them. Part of the problem is clear: the CPI is badly broken. This has been known for a long time. Congressional hearings and formal studies of the problem dating back to the 1990’s identified a systematic over-estimation of inflation by the CPI. Economists have estimated that the measurement error has contributed trillions to the federal deficit. The CPI is the benchmark for cost of living adjustments for social security payments, military pensions, and many other entitlements. (These problems are detailed in a previous column, here.) The Federal Reserve itself recognized the problems with the CPI over twenty years ago, and replaced it with the PCE for purposes of setting monetary policy. But the recent divergence is related to a more serious problem. It calls into question whether our conceptual understanding of inflation, and our techniques for measuring it, remain valid in a post-industrial, service-dominated and increasingly digital economy. This intellectual reckoning is overdue. Inflation was “invented” as an economic concept when the economy was based on principally mass production of commoditized products. It “works” for assessing the cost of gasoline, say, or eggs. It works (to a point) for labor costs involving farm labor, hourly wages for “metal bending” jobs in a factory, or piece-work in the garment industry. But economists today struggle to apply it to services, to the compensation for knowledge work (e.g., doctors, chip designers, educators), to housing costs, and to products that embody high-tech features enabled by software, realtime data, and network connectivity.
• Mate27

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  a year ago

  TLDR? Deflation Is Here But even aside from these larger questions, the latest CPI and PCE figures raise doubts about the basis of current Fed policy. The Federal Reserve is still of the official view that inflation rages on. The year-over-year PCE is just over 5%. Even if that is 140 basis points lower than the CPI, it is still seen as a serious problem. “By any standard,” Chairman Powell said recently, “inflation remains much too high.” But is it the case? Since the summer – that is, over the last two quarters, which is long enough to establish a baseline – the PCE measure of inflation has essentially achieved the Fed’s 2% target, at a continuously compounded annual rate. (For November and December, it fell below 1%.) The CPI is even lower for the last two quarters. The fact is that inflation decelerated swiftly during the 2nd half of 2022. The PCE fell from a 7.74% annual rate in the 1st half of the year to a 2.09% rate in the 2nd half. Similarly, the CPI dropped from 10.57% to 1.88%. Returning to the matter of the difference between the two measures, annualizing the monthly changes shows that the discrepancy exploded in the 1st half of 2022 – as inflation was accelerating. In the 2nd half of the year, as inflation disappeared , the gap also disappeared. In other words, the bathroom scale is most inaccurate precisely when it is most needed! A 283 basis point difference is extraordinary. Something is out of whack!
• Mate27

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  a year ago

  In conclusion….. other than I told you so!! The Lessons From All This It is becoming clear (except apparently to the folks at the Federal Reserve, and Larry Summers) that the weather has changed. The post-pandemic inflation surge, which began at the beginning of 2021 and peaked in he first half of 2022, has passed. The inflationary episode was transitory after all. The Fed’s official inflation target of 2% has already been achieved. The prospect for deflation is real and should be heeded. The Federal Reserve needs a new approach to measuring the price trends in the economy. The existing methods have become obsolete, and are producing inaccurate and misleading results. The Fed’s response so far to this has been to search for new ways to parse the existing data, to justify preserving the illusion that inflation is still the most serious threat we face. Chairman Powell and others have taken to talking about Core and now “Super-Core” inflation (which excludes food, energy and housing costs), inflation for “non-housing services” as opposed to goods (most physical goods are showing clear deflation trends so ignoring them is a way to keep the heat on), wage inflation (which reflects labor market “tightness” — the pseudo-problem of the moment), etc. etc.
• Mate27

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  a year ago

  Still want to call me names SkiDumb who was quarried as easing his clients statements as a gauge of economic indicators from a pool of people who clearly don’t have their shit together? now. “Inflation in December is likely to have run at around a 2.3 percent annualized pace on a 3- and 6-month basis, as compared with 5.1 percent on a 12-month basis.” Still, Brainard’s speech was full of classic bureaucratic swagger: “Inflation is high,” she assured her audience, “and it will take time and resolve to get it back down to 2 percent. We are determined to stay the course… Policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2 percent on a sustained basis.”
• mark94

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  a year ago

  If it takes you 20 paragraphs to explain why you won, you’ve lost. Your prediction a year ago amounted to “ inflation has peaked”. A year later, you are still bragging about that prediction. Yawn.
• Mate27

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  a year ago

  ^^ jeez, I thought you had more intelligence than that, butkibhuess that’s what yiu get when you’re a software engineer. If you had decent reading Comprehension, summer was only 6 months ago so we got another 6 months to go to say it was a year ago when I made my prediction. See you in 6 months Marky Mark, and then when August comes the readings will show 2% inflation, 3% tops. I get it Mark, your fragile ego won’t allow you to admit you’re rong. Yawn. I told you so! I am right and you aren’t.
• rickdugan

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  a year ago

  Mate still can't process the difference between temporary dips and a true normalization. Are wages coming down or even stabilizing? No. Has the tightness of the labor markets slackened? Again no. Until that changes, inflationary pressures will continue to boil beneath the surface. Eventually those ever-increasing input costs have to be passed on. It's also important to note that food costs continue their march upward and gas prices are rising again, both of which will be reflected in our next inflation readings. Rents are still rising fast too and while housing prices have dipped a bit, as a practical matter they are still way out of reach for many middle class prospects, especially given the current mortgage rates. IMO the economy needs a complete reboot in order to rebalance back to a natural supply/demand equilibrium. This will involve a job killing recession. It will also help when the Obamacare subsidies finally return to normal and the state of emergency is ended, thereby re-instituting work requirements for EBT. Until we ease labor market pressures, we are just kicking the can down the road until the next inflation eruption.
• Mate27

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  a year ago

  ^^ wow Dugan, 6 consecutive months to you computed to a momentary dip? SMH, I know you’re old and stuck in your ways, but of course anyone with a fragile ego can’t admit they’re rong, right? Keep in mind, my call inflation peaked August of ‘22 was met with resounding resistance, and somehow even with all evidence pointing to me being right, confirmation bias sticks with the curmudgeons on this board. Maybe Mark should stick to conspiracy theories and you stick with single mothers needing a cash infusion.
• Warrior15

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  a year ago

  The Rate of inflation may have peaked back last summer. But that doesn't mean that prices aren't still going up. Just not as fast as earlier in "22. But to agree with you just a little bit. I do think the Fed should at least stop raising rates for a while. Let's see if the increases are taking affect. Don't drive us into recession just to get inflation below 2% again.
• rickdugan

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  a year ago

  ===> "wow Dugan, 6 consecutive months to you computed to a momentary dip? SMH, I know you’re old and stuck in your ways, but of course anyone with a fragile ego can’t admit they’re rong, right?" Yes, momentary dip. The underlying conditions for further inflation problems haven't abated, but have only been temporarily suppressed. During the 70s they too had extended peaks and valleys, inevitably tied to the Fed raising rates just enough to temporarily suppress inflation before chickening out when the economy slowed and unemployment started to rise, which of course caused inflation to roar back. Rinse, repeat. It's all about wages and the labor market. Until that problem gets solved, inflation will continue to brew under the surface. I guess we really are doomed to repeat our mistakes. And again, food prices continue to rise at a healthy clip and now gas is joining back in. Expect the next inflation reading to reflect this.
• Mate27

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  a year ago

  .^^ Parsed words “it’s all about wages and the labor market”. Spoken like Larry Summers and the federal reserve, which this article addressed. FYI: the recent rise in gasoline is absolutely a “momentary blip” and conducts a small portion of inflation picture. Additionally, the only reason why has prices have momentarily lifters is due to refinery outages from the freezing weather we experienced during the holidays. Capacity is being brought back up and prices will soon be dropping again, adding to another round of “I told you so”! Ha ha. You just can’t stand it that I am right and you’re blatantly rong, hurting that fragile ego of yours.
• rickdugan

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  a year ago

  ===> "Spoken like Larry Summers and the federal reserve, which this article addressed." The article made a couple of breezy subjective assessments in passing. Wages are baked into almost all of our goods and services, most especially including those that consume the highest % of household budgets (food, energy, automobile gas). If wages keep going up, so too will inflation.
• Mate27

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  a year ago

  ^^totally correct assessment, however we know that’s a BIG IF considering the type of jobs being created are low paid part time gigs without benefits. Anyhow, wages were up slightly less than 5% yoy at the end of 2022, so real wages actually fell compared to inflation. Spending is falling therefore leading to less demand for goods (deflation) and services (partially inflated). Fed rate increases aren’t showing up in the backwards looking flawed gauges. Warrior, some prices are continuing to go up, but overall prices are not. Cars, commodities, and shelter are dropping. Food and some service are up, along with some service sectors. Again, parsing of the data. Glad you chimed in, because overall the whole point of my peak inflation call last summer wasn’t to say “look at me, I’m smart”. It was simply to point out the flaws the fed uses to read the indicators which will eventually pull us into a recession.
• JimGassagain

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  a year ago

  I will believe deflation is here once I see the prices for my favorite delicacy drop on……. Bacon!!
• skibum609

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  a year ago

  Mate, like most of those relying on public assistance, likes to pretend she is rich and knows a lot about economics. How utterly pathetic, yet fitting for such a little cunt.
• Mate27

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  a year ago

  ^^ angry old cuck who thinks this is an Apple News article because he can’t stand to believe he is rong! If you had my money you’d burn yours just to warm your old saggy balls iced over from walking out of a New England dive club. You never get tired of how stupid you show yourself, be aside as they say tye stupid don’t know they’re stupid. Kind of like a mongoloid walking around all smiling, except you don’t even know why you’re so angry, other than you were bullied so much you’ve hit that permanent dent in your forehead from furrowing your eyes all day. Jajajajajajaja!! God you’re dumb. Just go ahead and die already. You killing yourself would be the greatest accomplishment in an otherwise pathetic life. Can’t wait for the final summer inflation print of 2023 to remind you “I told you so!”
• skibum609

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  a year ago

  ^Just a loudmouth. People with money wouldn't brag about it on this board. Only a fucked up loser would. I pity you. Really, pity you. Don't breed.
• Mate27

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  a year ago

  ^^ yiu know how we know how stupid you really are? I never ever have mentioned how much money I have or what amount of wealth I’ve accumulated, yet when I comment on things related to personal finance your primate mind automatically assumed I was making a boast about my wealth. Considering I know how big of a lazy ass bullshit artist of a loser lawyer you are, I can guarantee you will never find a post where I made any kind of statement I made about “brag about it on this board.” This is just another stupid baseless claim by one of the stupidest members ever to comment on this board. In fact SkiDumb, I’d put you in the category of being dumber than Icee. That’s how pathetic you are yiu lazy ass lying thieving cuck of a “lawyer”. Yeah lawyer is in quotes because I doubt you got your degree at any credible university. I bet you failed out of clown school because Bozo told you that you’d never amount to anything so you decided to get a law degree.
• skibum609

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  a year ago

  ^The fake rich guy is literally the whiniest little bitch ion earth. I pity you, you fucking little girl. Sorry your life sucks and everyone who knows you laughs at you. Stop being a cunt is my suggestion to you. By the way moron, there was more than one Bozo. To whom are you referring?
• Mate27

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  a year ago

  ^^ hey SkiDumb, just because you’re lifelong dream of becoming a clown failed once you dropped out of clown school forces you to become a lawyer, don’t go projecting your failures onto others. I’m sure the sting of Yucko and Bozo tye clown sending you your walking papers still resonates deeply onto your fragile ego. The fact is, I was right this whole time, and you were rong. Projecting your failures once again as you’re the true whiny little cuck. Get sober for once. Attorney is probably the only job you can do high. Read more of your client’s statements for your leading economic indicator….smh!! Rolmfao!!!
• Mate27

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  a year ago

  Looks like mainstream media is starting to sound the alarm on deflation, something I’ve been saying since summer of ‘22. Cite cnbc, even though they’re in bed with the liberals… [view link]
• Mate27

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  7 months ago

  Year in review!