So, where's the inflation?

I waited too long to update the inflation and interest rate tracking charts, but here they are.  First thing that hit me last night after posting the numbers was: Where the heck is the inflation that's been making so many headlines?  Or, more precisely, why isn't the higher than normal CPI inflation showing up in any of the other inflation indicators? 

Click to enlarge:

Nominal interest rates are falling across the board, the bond market thinks inflation is 2.3%, and the trimmed mean PCE inflation rates are between 2% and 3%, just where we'd like to see them.  As I've said before, there's not a single best indicator of inflation, but if I had to pick one, it would be the trimmed mean PCE (the two red lines in the second chart); sorry, I don't see an inflation problem. 

Not yet, anyway.  If inflation is supposedly just around the corner... well, that's where doomsday has been lurking for the forty years I've been watching, so I guess it's not a surprise. 

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Comments

[Objectivist Bill]

If you want to here alarmist doomsday banter, try to listen to some of those infomercials that are push gold as an investment. One says that "real" inflation is 6 to 12 percent, based on the decline of the US dollar vs the Euro. Strange, I wonder if they said we were in a deflation when the Euro was falling against the dollar from 1/1999 to 2/2002?

THe problem is that no measure of inflation will satisfy everyone because we all spend/save/invest our incomes differently. My cost of living will go down in June as my second mortgage is paid off.

[Gunthestops]

Steve, who benefits the most when inflation is understated? Governments throughout history have always tried to spend more money then they can collect. Inflation is just a hidden tax that hits the poor and middle class the hardest. The deeper a country is in debt the more beneficial it is to its government to have higher inflation. Headline inflation is a more realistic measure for average Americans and it is most likely understated as well.

[Mike H]

I'm glad you're still not worried Steve. Brian Wesbury and Kudlow were starting to get to me. I hope your right, but do you understand why Wesbury believes the TIPS measurement of inflation continuously underestimates inflation? He also things inflation lags fed action by 2 years, which would mean we are in for a lot more inflation in the future. Does he fixate too much on headline inflation? I've been trying to figure this out.

[William Woody]

I think part of the disconnect may come from the fact that we look at nearly $4/gallon gas in California and chicken from the local KFC going up about $8 for a 20-piece bucket from this time last year, and think "inflation? I got your inflation right here!"

Most of the inflation seems to come from two sources: increased cost of corn (because of the amount of corn being used for ethanol production) which drives up other food stuffs, and the increased cost of gasoline. And both of those are not counted in core CPI. When you toss those two in, you get 4.0% CPI. And when you drill down into the table representing the basket used for CPI calculations, year-over-year unadjusted inflation (table 3) for fuel oil is up 37.9%, gasoline is up 32.8% for regular gasoline. Many food stuffs have also experienced double-digit inflation: eggs are up 25%, milk up 18.8% and chicken up 9.2%.

Of course no-one pays attention to the other aspects of total CPI (+food and fuel), such as the decline in price for bacon or sugar: it's easier to look at just the few 'hot spots' and think somehow the government is lying to us about the rest. And of course it's easy to sell the idea that the CPI isn't a real metric when people look at their rising food and fuel bills and say to themselves "2.3% Yeah, right..."

[Tom Hanna]

Obviously there are disinflationary, even deflationary, pressures at work, too. Look at year-over-year growth in M1. But there's also a clear push to inflate, with Helicopter Ben practically begging any financial institution to borrow from the Fed at a real rate of 0%. I suspect many markets are pricing in future inflation.

[Optimist123]

Mike:

To describe my position, "not worried" isn't as accurate as "still skeptical"; I'm not in the business of forecasting inflation or interest rates. (If I were, I'd be making a killing trading bond futures in my spare time instead of blogging.)

I do have a lot of respect for Wesbury's analyses, and as soon as I see the inflation predictions turning into actuals in these charts, I'll be the first to post them and give him credit for trying to warn us. The first emergency rate cut by the Fed was seven months ago, so if that was inflationary, we should start seeing it very soon in the Dallas Fed's trimmed-mean PCE inflation number.

[Bob]

Just because inflation hasn't made its' rounds to final prices does not mean there is not some bad news in the pipeline. Check out the link at the end noting the table on the right. Those are some hefty increases, folks.

Either a bubble has to pop in the commodity markets or we're in for a rough time. To heck with Core CPI, we still have to drive and eat.

http://www.econbrowser.com/archives/2008/03/commodity_price_1.html

[Counter Revolutionary]

Bob, I'm in agreement. We seem to be bumbling from one bubble to the other. With the interest rates so low money keeps chasing the latest investment with above average returns. Commodities now, what's next after the bubble bursts?

[Charlie]

Illiquidity risk

http://www.marketwatch.com/news/story/message-bond-market-about-inflationary/story.aspx?guid=%7BBE76F1EC-D5A9-4984-9799-5D79C8B3658B%7D

And a revised chart from the Cleveland Fed.

http://www.clevelandfed.org/research/inflation/TIPS/index.cfm

I know you favor simple over complex models, but it is probably worth noting that the Cleveland Fed disagrees

[bfaul]

"So, Where's the inflation"

You're looking in the wrong place. Check out the grocery stores. Do you ever pick up a gallon of milk or a loaf of bread? If not, ask your wife, she'll tell you. The price of gasoline is now catching up to the price of oil. Retailers can no longer continue to eat the rising costs of deliveries. The cost of production of everything, and I mean everything, must now go up. So how can you pretend that inflation is not a problem? The indicators are lagging a little bit, that's all. They'll be there in the next report.

[Optimist123]

bfaul

I've been there, and noticed a few prices higher because of the corn-based ethanol subsidies reducing the supply of corn for food -- in turn because Iowa's caucuses take place early in the political process.

On the bright side, I've also been to the computer store, and couldn't believe the unbelievably low price I paid for a new computer compared with what I would have had to pay if I'd bought it six months earlier.

[bfaul]

Technology may be cheaper, Steve, but you can go without it. When tech prices are high those living paycheck to paycheck just quit buying it. They can't do that with food. The spikes in food prices that are happening as we speak are directly due to higher fuel prices, although I don't doubt that ethanol figures into it, but the two are related in any case.

My point, of course, is that with higher fuel prices inflation becomes inevitable, that's all.