Signs of Disinflation (Hatzius)

And this Fed fears deflation a lot more than inflation:

  • We see signs that the upside inflation surprises of 2011 have ended. Our new statistical summary of the price components of business surveys such as the ISM, Philly Fed, and NFIB points to decelerating inflation. In addition, our unweighted CPI diffusion index, which measures the breadth of price changes across 178 detailed price categories, fell to its lowest level since late 2010.

Inflation has been above our expectations in 2011, but we expect a substantial part of this surprise to reverse and see core inflation clearly below the Fed’s “mandate-consistent” level of 2% or a bit less by the end of 2012. The reasons are straightforward. There is still a large amount of slack in the US economy; nominal wage inflation remains very low; and much of the inflation pickup of 2011 can be traced to temporary factors such as short-term commodity price pass-through and upward pressure on motor vehicle prices in the wake of the Japanese earthquake. (We do not expect a full reversal of the core inflation pickup because the increase in rent inflation is likely to be more persistent.)

The recent inflation data have started to look more consistent with our view of moderating core inflation. The consumer price index (CPI) excluding food and energy has risen at an annualized rate of just 1.2% over the past two months, the lowest rate since December 2010 Statistically based measures of core inflation such as the Cleveland Fed’s weighted-median and 16% trimmed-mean CPI send a similar message.

Our unweighted CPI diffusion index is also starting to look a bit more benign again. It is constructed by seasonally adjusting all 178 individual CPI categories for which we have sufficient data, calculating the month-to-month change, and then reporting the percentage of categories showing price increases plus half the percentage showing no change. That is, values above 50 indicate that more categories are seeing price increases than decreases; the higher above 50, the greater the breadth of price increases relative to price decreases. (We perform our own seasonal adjustment because the Labor Department only provides seasonally adjusted CPI data for a subset of product categories.) Exhibit 1 below shows our diffusion index. While it is still clearly above the levels of 2009 and 2010, the October 2011 reading was the lowest since November 2010.

Exhibit 1: CPI Diffusion Index Has Started to Slow

chart


To gain more insight into future inflation trends, we have constructed a new measure that summarizes the inflation signal from various business surveys. Specifically, we calculated the first principal components of the price-related questions in the monthly ISM, Chicago PMI, Philly Fed, NFIB, Kansas City Fed, and Richmond Fed business surveys. These questions refer to prices paid, prices received, or wages and salaries and are generally reported as the difference between the percentage of respondents saying that prices rose in the survey month and the percentage saying that prices fell. (Focusing only on prices paid or prices received indexes does not make a significant difference to the results.)

The results are shown in Exhibit 2 below. In general, our business survey indicator of inflation tracks the ups and downs of the core PCE index–the Fed’s favorite measure of underlying inflation–reasonably well. After a significant acceleration in early 2011, the indicator has declined notably in recent months and is now consistent with a deceleration in core PCE inflation from the recent 2%+ level to somewhere closer to 1.5%. This is also consistent with our forecast that inflation will slow over the next year.

Exhibit 2: Business Survey Inflation Shows Recent Deceleration
chart

This entry was posted in Fed, Inflation. Bookmark the permalink.

19 Responses to Signs of Disinflation (Hatzius)

  1. Maybe you could visit http://www.shadowstats.com and republish their analysis of inflation…12%… which is closer to reality experienced by folks struggling to pay for bread and milk.

    The Fed’s inflation numbers are an insult and you know it.

    Reply

    WARREN MOSLER Reply:

    different point. the Fed uses what it uses, and so to anticipate the Fed you anticipate its actual reaction function.

    Reply

    TC Reply:

    @Robert Bostick, This is not true for my personal purchases.

    Also, if Shadow Stats is true, then the U.S. government is making about 10% a year just by holding debt.

    It’s literally free money for the United States. High inflation rates combined with zero nominal interest rates means investors are paying the U.S. government the inflation rate for the privilege of buying U.S. government debt.

    So if you are claiming Shadow Stats is correct, you’re also claiming investors are paying the U.S. government 10%+ per year. I don’t think you believe investors are paying the U.S. 10%+ per year.

    Reply

    Kristjan Reply:

    @TC,
    “Also, if Shadow Stats is true, then the U.S. government is making about 10% a year just by holding debt.

    It’s literally free money for the United States. High inflation rates combined with zero nominal interest rates means investors are paying the U.S. government the inflation rate for the privilege of buying U.S. government debt.”

    I think this is not a very good argument considering MMT view that interest rates on long term treasuries are market’s anticipation of FED reaction to inflation for exaple. It is ‘free money’ any way for the United States.
    You can’t say that interest rates are market’s anticipation of fed’s future policy and then ask why are interest rates lower than inflation if fed’s inflation figures are questioned. Real interest rates can be negative on treasuries in case they reflect market’s anticipation of fed policy in the future. I am not saying that Shadow Stats is right but you cannot use the treasury interest rate argument against them.

    Reply

    WARREN MOSLER Reply:

    Congress doesn’t ever ‘have’ or ‘not have’ dollars. it spends by changing numbers up in our accounts and taxes by changing numbers down

    see the 7dif

    Kristjan Reply:

    @Warren,
    I miss your point

    WARREN MOSLER Reply:

    i was agreeing with you, sorry

    Kristjan Reply:

    @Warren,
    Thanks,
    I always knew this argument was flawed.
    It scores you points fast but It’s not right

    Art Reply:

    @Robert Bostick,

    “inflation…12%… which is closer to reality experienced by folks struggling to pay for bread and milk.”

    As painful as that is to many households, it’s not inflation, but relative price shifts (it has to be the latter unless incomes are growing enough to accomodate higher milk and bread prices without impacting other parts of the ‘consumption basket’). Williams hopelessly confuses the two, distracting us from focusing on actual causes and solutions.

    And pretty solid recent research (that did not have this as its objective) indicates that actual, pure inflation (decline in the aggregate purchasing power of money) is only around 15-25% of measured inflation. So even if Williams claim of 12% were accurate (it’s not), it would net out to 3% inflation at worst.

    Reply

  2. Tom says:

    Quick question….I was reading some comments from folks arguing fiat vs. fixed currencies. And someone brought up expanding the money supply and the response was this:

    “It’s a fallacy that you need more currency to have growth. With a stable money supply, prices simply go down and standard of living goes up. This is what happened in the late 1800s. Prices went down, but we still experienced massive growth.”

    Any comments on this? Not sure what to ask specifically, but are they right?

    Reply

    beowulf Reply:

    @Tom,
    “Prices went down, but we still experienced massive growth.”

    Good Lord, why do you waste your time debating with people who lie to you about easily verifiable facts? I’m not going to waste another thought to this issue, but if you’re a glutton for punishment, there’s always wikipedia.

    The Long Depression was a worldwide economic crisis, felt most heavily in Europe and the United States, which had been experiencing strong economic growth fueled by the Second Industrial Revolution and the conclusion of the American Civil War. At the time, the episode was labeled the Great Depression, and held that title until the Great Depression of the 1930s. Though a period of general deflation and low growth began in 1873, (ending about 1896)… it did not have the severe “economic retrogression [and] spectacular breakdown” of the latter Great Depression.
    http://en.wikipedia.org/wiki/Long_Depression

    Reply

    Tom Reply:

    @beowulf,

    ha thats funny. thanks for the quick additional lesson

    Reply

    TC Reply:

    @beowulf, You know there is a whole cottage industry of neo-Austrians who claim the long depression was a good time for the U.S.

    Selgin claims this all the time and it’s B.S.

    It’s only because everyone who lived through that time has died they are even able to make this claim. It was widely known as horrible times in the United States and started people thinking about creating a federal reserve.

    These were horrible times and no revisionist history changes this fact. I’d say the average GDP during that time greatly overstates the human misery of the period, because volatility matters.

    Compare two wage streams, both averaging $3,000 a year. One you make $6,000 one year, and $0 the next year. the other you make $3,000 both years. People clearly prefer the second one.

    But the average is the same. If you look at the long Depression, not only was the growth low, there were massive swings in growth rates. There were huge years of 5% plus, and years of 4% GDP destruction.

    These swings aren’t pleasant for people, even though the average might not be bad overall.

    You’ll find people saying stuff like “the average growth in the 1870’s wasn’t bad” and including the boom years of 1870 and 1871 as part of the “proof” these times were good times. I’ve had online discussions with relatively well known people who made this exact claim.

    Of course, this is the equivalent of saying “the average growth from 2005-2010 was positive, so things weren’t that bad in the late 2000’s.”

    We know this is total BS. Yet, we’ll have the 2070 equivalent of George Selgin saying this unless we reform the entire economics profession by forcing them to adopt what they should have adopted 100 years ago – consistent accounting.

    Reply

    Tom Reply:

    @TC,

    That is basically the answer I saw posted in response. Here, take a look. Ill post their response below:

    From Freakoutonomics, by Charles R Morris:

    Historians long attributed the turmoil to a “great depression of the 1870’s.” But recent detailed reconstructions of 19th-century data by economic historians show that there was no 1870’s depression: aside from a short recession in 1873, in fact, the decade saw possibly the fastest sustained growth in American history.

    Employment grew strongly, faster than the rate of immigration; consumption of food and other goods rose across the board. On a per capita basis, almost all output measures were up spectacularly. By the end of the decade, people were better housed, better clothed and lived on bigger farms. Department stores were popping up even in medium-sized cities. America was transforming into the world’s first mass consumer society.

    But why did people feel so miserable? Partly they were confused by prices, which were dropping sharply. Farmers thought falling grain prices meant they were getting poorer, without noticing that the price of everything else was falling too. Farmers’ terms of trade — the price differences between what they sold and what they bought — actually racked up solid gains in the 1870’s.

    From Rollback, by Tom Woods:

    As for historians, they seem to have been fooled by the statistics on consumer prices, which fell an average of 3.8% per year. And since the conventional wisdom says that consistently falling prices will cause the earth to break free of its axis and go tumbling toward the sun, they concluded that this must have been a time of terrible depression. With the gold standard restored in 1879 after being abandoned during the Civil War, the 1880s were likewise a period of great prosperity, with real wages rising by 20%.

    “We’re conditioned to think that falling prices = bad, but that’s just not necessarily so. In the link you provided, it says “Figures from Milton Friedman and Anna Schwartz show net national product increased 3 percent per year from 1869 to 1879 and real national product grew at 6.8 percent per year during that time frame.” That’s not a depression. Also, it says “Construction began recovery by 1879; the value of building permits increased two and a half times between 1878 and 1883, and unemployment fell to 2.5% in spite of high immigration.” Call me when the US ever gets back to 2.5% unemployment while continuing to prop up the malinvestments and bad debt with deficit spending and bailouts.”

    WARREN MOSLER Reply:

    FROM RECESSION.ORG:

    1893 – 1896

    The 1890s recession, also referred to as the panic of 1893, was brought on by the failure of the United States Reading Railroad. The failure prompted European investors to then withdraw their investments, and left the U.S. financial system in a shattered mess.

    First, the failure of the railroad put many workers out of business, and so the unemployment rates skyrocketed. Also, when European investors pulled their support, this led to a stock market and banking collapse that left what remained of a stable U.S. economy in tatters, and left America in a definite, defined recession.

    To make things worse, a run on the gold supply incited panic in many, and confidence in both the banks and the currency plummeted. Again, we see how America is so reliant on other economies for things to work, just like many other economies rely on the U.S. economy for things to go well.

    WARREN MOSLER Reply:

    in theory prices can deflate with productivity and with unspent income on a gold standard, for example, but only if you somehow model taxation as ‘competitive’ and ‘voluntary’ or if you don’t have any taxation. And in practice the periodic ‘panics’ on the gold standard were the cause of leaving it.

    Reply

    Tom Reply:

    @WARREN MOSLER,

    I dont understand, why do so many people think that no matter how large the economy grows, there doesnt need to be a growing money supply to facilitate trade?

    Reply

    Art Reply:

    @Tom,

    “Not sure what to ask specifically, but are they right?”

    Only if nominal contracts (for example, interest and principal due on debts, wages, etc) are somehow indexed to the price level.

    Smart Austrians know and admit this. For example, Mises claimed that contracts under the classical gold std were indexed in such a way. But it was a wave of the magic wand argument (haven’t found anything more substantive from him), and one that the existence of the bimetallist movement argues strongly against.

    Most Austrians, like the ones you’re debating, don’t have any clue about this fact, and will stubbornly deny it in order to avoid the discomforts and intellectual dislocation it causes (for example, by Murray Rothbard’s definition, the gold standard was inherently inflationary, which is heretical for them to even contemplate).

    Reply

  3. Anon Seven says:

    Deflation? I don’t think so…

    Hasn’t Peter Schiff assured us that we’ll get hyperinflation sometime around 2011?

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>