How long can the Fed whistle past the "There is no inflation" graveyard before raising rates?

David Goldsmith

All Powerful Moderator
Staff member

Inflation Galore at Manufactures, amid Massive Shifts in Demand, Supply-Chain Snags, Shortages, Lack of Shipping Capacity. And They’re Passing it On​

For now, the story is that the sudden and massive shifts in the economy in 2020 have caused shortages and distortions in the goods-producing sectors and in shipping and trucking, as consumer spending has shifted from services – such as flying somewhere for vacation and spending oodles of money on lodging and restaurants and theme parks – to goods, particularly durable goods.

The story is that prices are rising because components and commodities are in short supply, and supply chains are dogged by production issues, and are facing transportation constraints, as demand for those goods has suddenly surged. And that all this is temporary.
And the Fed has said it will ignore inflation for a while, that it will allow it to overshoot, and only when it overshoots persistently for some unknown amount of time and becomes “unwelcome” inflation – “unwelcome” for the Fed – that it will try to tamp down on it.
Meanwhile, inflation pressures are building up. Two reports out today show a large-scale surge in price pressures for manufacturers – and they’re able to pass them on to their customers.

The Prices Index “surged dramatically in January” to a level of 82.1%, after an eight-month upward trajectory, the highest since April 2011, “indicating continued supplier pricing power,” said the Manufacturing ISM Report On Business.
In the ISM data, a value above 50 means expansion, and a value below 50 means contraction. The higher the value is above 50, the faster the expansion. January saw the fastest expansion of the Prices Index since April 2011 (data via YCharts):

Of the roughly four dozen commodities in the index – from corrugated boxes via cold rolled steel and plastic resins to memory chips – only one showed a price decline (caustic soda); all others increased. Some of the prices started increasing more recently, but others have been increasing for eight months, including copper.
A number of commodities were considered in “short supply,” including:
  • Copper
  • Corrugated Boxes (for 3 months)
  • Electrical Components (for 4 months)
  • Electronic Components (for 2 months)
  • Freight, trucking
  • Semiconductors (for 2 months);
  • Steel (for 2 months), cold rolled; fabricated; and hot rolled.
The ISM data is based on how executives see business conditions at their own companies. The names of the companies are not disclosed in the report. Executives are asked if various business conditions – orders, prices, employment, etc. – are up or down in the current compared to the prior month.
Concerning prices, 64.3% of the executives said that prices rose in January compared to December, while 35.7% said that prices remained the same, and 0% said that prices declined.
For manufacturers and their supply chains, the shifts in the economy, and also other issues are contributing to a slew of problems: “Survey committee members reported that their companies and suppliers continue to operate in reconfigured factories, but absenteeism, short-term shutdowns to sanitize facilities, and difficulties in returning and hiring workers are continuing to cause strains that limit manufacturing growth potential.”
Similar price pressures were reported today in the IHS Markit U.S. Manufacturing PMI, which added that manufacturers, given the strong demand, were able to pass a portion of these cost onto their customers via increases in selling prices.
In January and also December, supplier performance “deteriorated to the greatest extent since data collection began in May 2007,” the report said. “Supply chain disruption reportedly stemmed from raw material and transportation shortages, notably trucking,” and also from overseas “due to a lack of shipping capacity.”
“Lead times are lengthening to an extent not previously seen in the survey’s history, meaning costs are rising as firms struggle to source sufficient quantities of inputs to meet production needs,” the report said.
And “amid favorable demand conditions,” manufacturers were able to pass these higher costs on to their customers via higher prices, “with selling prices rising at the fastest pace since July 2008.”
The report cited strong demand for goods from consumers and from businesses that “are investing in more equipment and restocking warehouses.”
The report too assumes that the supply conditions will start to improve, and “these price pressures should ease,” but they “could result in some near-term uplift to consumer goods price inflation.”
So for now, everyone is on the bandwagon that these price pressures are just temporary, a result of the sudden shifts in the economy, and that they will reverse when those shifts reverse.
Consumer spending on goods has surged in 2020, particularly on durable goods, as demand for services, which account for nearly 70% of the economy, has dropped sharply. There is now massive inflation in shipping costs, including ocean freight, driven by the surge in demand for goods and capacity constraints. In December, spending on durable goods, though down for the second month in a row, was still up 11% from a year earlier after a historic spike in demand (from Americans Cut Back as Income from Wages & Salaries Hit Record as 10 Million People Still out of Work: Weirdest Economy Ever):


David Goldsmith

All Powerful Moderator
Staff member

Inflation Pressures Heat Up Even in Services​

Big parts of the services sector – such as restaurants, entertainment, lodging, and travel – have been hit hard during this crisis. Other parts of the services industries – such as real estate, services related to ecommerce, transportation services, video games, streaming services, etc. – have boomed. And other segments in services have muddled through. Services account for nearly 70% of the economy. Despite the decline in overall demand for services, inflation pressures are heating up – both in terms of prices paid by service firms, and the prices they charge their customers, according to two measures for these price pressures in January.
Across the US service sector, “cost burdens soared once again, with the rate of input price inflation the fastest since the survey began in 2009, according to the IHS Markit U.S. Services PMI this morning. “And the rate of increase has now accelerated for three successive months,” it said.
“Firms largely passed on higher costs to clients through a marked rise in charges,” it said, meaning that the resistance to higher prices appears to have faded, and companies get away with raising prices without losing customers.
“Service providers recorded a steep increase in selling prices during January,” it said amid “strong client demand and a spike in input prices.”

“The rate of charge inflation was the second-quickest on record [its records going back to 2009], only slower than the peak seen in November 2020,” it said.
“Inflation therefore looks likely to be pushed higher in the near-term,” it said.

And yet, business for the services sector is not red hot.

Hiring has been slow: “Despite a faster rise in new business, a number of firms reported sufficient capacity to process incoming new work in January. As a result, companies increased workforce numbers only marginally, and at the slowest pace since July 2020.”
“The increase in outstanding business was the softest in the current seven-month sequence of expansion,” it said.
And there is still the theme that some of this inflation is just temporary, a result of the distortions during the Pandemic.
“Some of these price pressures reflect short-term supply constraints, which should ease in coming months as the recovery builds and more capacity comes online,” it said.
Also this morning, the Institute of Supply Management released its Services ISM Report On Business. It also reported surging input prices, though the pace of increase in January has slowed somewhat from the November surge, which had been the fastest in years.
The ISM’s index for prices at 64.2 was down 0.2 percentage points from December (seasonally adjusted), indicating that prices increased but at a slightly slower rate than in December.
A value above 50 indicates expansion. A value below 50 indicates contraction. The higher the value is above 50, the faster the expansion (data via YCharts):

Both PMIs here – the one from IHS Markit and the one from ISM – base their data on how executives see business conditions at their own companies. The names of the companies are not disclosed in the reports. Executives are asked if various business conditions – orders, prices, employment, etc. – are up or down in the current month compared to the prior month.
Of the 18 service industries in the ISM index, 16 reported price increases in January, compared to December, and two industries reported no change. The 16 industries that reported an increase in prices paid were in that order:
  1. Wholesale Trade
  2. Construction
  3. Agriculture, Forestry, Fishing & Hunting
  4. Retail Trade
  5. Accommodation & Food Services
  6. Mining
  7. Arts, Entertainment & Recreation
  8. Transportation & Warehousing
  9. Health Care & Social Assistance
  10. Professional, Scientific & Technical Services
  11. Public Administration
  12. Utilities
  13. Management of Companies & Support Services
  14. Other Services
  15. Finance & Insurance
  16. Educational Services.
A step or two further down the road, at the consumer level: The Consumer Price Index picks up price changes well after companies are reporting them.
The CPI for services (red line in the chart below) has increased mostly between 2% and 3% year-over-year for the last decade and has dropped during the Pandemic, as demand for many services (hotels, flights, etc.) has collapsed.
Prices of nondurable goods (green line), which include food and energy, have gyrated wildly over the years, in response to volatile commodity prices.
And the CPI for durable goods (black line), whose year-over-year increases are almost always lower than services, and have been negative thanks in part due to rampant “hedonic quality adjustments,” has begun to spike amid a historic surge in demand:

During the pandemic, the collapse of some services, including travel, has caused those prices to drop, but people’s budgets aren’t going to those services at the moment. The budgets have been redirected to purchases of goods – particularly durable goods whose prices have jumped.
The manufacturing PMIs two days ago revealed the sharpest price increases in years, input prices and selling prices, as the goods producing sector has experienced a sudden surge in demand amid shortages of components and commodities – including semiconductors – due to the sudden shifts in the economy.
What the services PMIs are telling us is that there are price pressures now building up even in services though the services sector overall is far from having recovered, and in many aspects of services, demand remains weak.

David Goldsmith

All Powerful Moderator
Staff member
I wish they had included a chart for iPhones.

Dollar’s Purchasing Power Drops to Record Low, Despite Aggressive “Hedonic Quality Adjustments”​

Spiking prices for new and used vehicles under the microscope.

The “Purchasing Power of the Consumer Dollar” – part of the Bureau of Labor Statistics’ Consumer Price Index data released today – is the politically incorrect mirror image of inflation in consumer prices, as measured by the Consumer Price Index (CPI). By wanting to increase consumer price inflation, the Fed in effect wants to decrease the purchasing power of the consumer dollar, to where consumers have to pay more for the same thing. Thereby it wants to decrease the purchasing power of labor paid in those dollars.
And that purchasing power of the dollar in January dropped by 1.5% year-over-year to another record low:

Note how the purchasing power of the dollar recovered for a few months during the Financial Crisis, when consumers could actually buy a little more with the fruits of their labor. The Fed considered this condition a horror show.
Inflation in durable goods, non-durable goods, and services.
The overall CPI for urban consumers, the politically correct way of expressing the decline in the purchasing power of the dollar, rose 1.4% in January, compared to a year earlier.
Each product that is in the basket of consumer goods tracked by the CPI has its own specific CPI. And all these products fall into three categories: durable goods (black line), nondurable goods (green line), and services (red line), with services accounting for 60% of the overall CPI. Here they are, with discussions below:

The CPI for services (red line) – everything from rent to airfares – increased mostly between 2% and 3% year-over-year for the last decade, but dropped during the Pandemic as demand for services such as hotels, flights, and cruises collapsed. For example, in January, year-over-year, the CPI for:
  • Airline tickets: -21.3%
  • Hotels: -13.3%
  • Admission to sporting events: -21.4%.
The CPI for nondurable goods (green line) is driven by the volatile categories of food and energy. Energy prices, such as gasoline, plunged in earlier in 2020 as demand collapsed, but started to rise months ago. Food prices too are rising. In January, the CPI for nondurable goods was up 0.7% from a year ago, after having been down 3.6% year-over-year in May.
The CPI for durable goods (black line) has spiked in recent months on a year-over-year basis amid a surge in demand for some durable goods. In January, it was up by 3.5% from a year ago The past three months have been the steepest year-over-year increases since 1995.
The ironic element here is that CPI for durable goods declined for much of the past 20 years though new cars and used cars and smartphones and a million other things have gotten more expensive. The decline was in part due to aggressive “hedonic quality adjustments” – we’ll get to those in a moment – which remove the costs of quality improvements from the CPI.

New and used vehicles and “hedonic quality adjustments.”

New and used vehicles account for 16% of the CPI for durable goods.
Prices of new vehicles have soared over the years. The industry measure of “average transaction price” indicates how much money consumers spent on average per new vehicle, a function of price increases and a greater percentage of high-dollar vehicles in the mix. In January, per J.D. Power, the average transaction price soared by 11% from a year ago (to $37,165).
But the CPI for new vehicles in January ticked up by just 1.3% from a year ago.
To demonstrate how silly the CPI for new vehicles is compared to what consumers actually pay for new vehicles, I constructed the WOLF STREET “Pickup Truck & Car Price Index,” which takes the Manufacturer’s Suggested Retail Price (MSRP) by model year of the best-selling truck and of the best-selling car over the decades and compares them to the CPI for new vehicles. The discounts and incentives are there every year and so cancel out when comparing year-over-year price increases.
Since 1990, the CPI for new vehicles has risen by 22.5% (green line). Over the same period, the base MSRP of the Toyota Camry LE has soared 68% (red line); and the base MSRP of the Ford F-150 XLT has skyrocketed 170% (blue line):

In dollars terms, since 1990: The Camry LE base MSRP rose from $14,658 to $24,970; the F-150 XLT base MSRP rose from $12,986 to $35,050; and the CPI for new vehicles rose from an index value of 121.9 to a value of 149.4, and stunningly is today just a tad above where it had been 23 year ago in January 1997:

A big part of the difference between actual price increases and the CPI for new vehicles are the “hedonic quality adjustments” that started to be applied with increasing aggressiveness in the late 1990s through today. The logic is that vehicles have gotten a lot more sophisticated over those years, for example, going from three-speed automatic transmissions to 10-speed computer-controlled transmissions. The hedonic quality adjustments remove the costs of these quality improvements from the CPI.
Even if this is calculated properly, without a political agenda to distort CPI downward, it puts the consumer in a bind because at the lower 60% of the income scale, wages have barely kept up with the overall CPI, but have not nearly kept up with the price increases deemed to be due to quality improvements.
Consumers have responded to these price increases by buying fewer new vehicles, switching from new to used vehicles, driving vehicles for longer, from 8.9 years on average in 2000 to 11.9 years in 2020, and financing them for longer, with seven-year auto loans now being all the rage.
The CPI for used vehicles is also subject to these hedonic quality adjustments. So the same scenario is playing out here. But, but, but… among the distortions of the Pandemic was a sudden and historic spike in used vehicle prices over the summer that couldn’t be removed with hedonic quality adjustments. In January, the CPI for used vehicles was still up 10% from a year ago. Despite the huge spike in the CPI, the index level is still below where it had been 20 years ago in 2000-2002:

These aggressive hedonic quality adjustments make sure that CPI, and particularly the durable goods CPI, do not reflect actual price changes that consumers face. Consumers understand that they’re getting a better product that costs more to manufacture. But that doesn’t mean that they have the money to buy a new truck, when years earlier consumers with an equivalent income did have the money to buy a new truck.

David Goldsmith

All Powerful Moderator
Staff member

10-Year Treasury Yield Hit 1.21%, More than Doubling Since Aug. But Mortgage Rates Near Record Low. And Junk Bond Yields Dropped to New Record Lows​

Bond Market Smells a Rat: Inflation. So the Fed seems OK with rising long-term Treasury yields.

The bond market smells a rat, but the mortgage market and the high-yield bond market are holding their nose and plowing forward: The 10-year Treasury yield rose to 1.21% on Friday, the highest since February 26, when markets began their gyrations. This yield has more than doubled (+133%) from the historic low of 0.52% on August 4.

In early August, Wall Street hype mongers were still out there pushing the meme that the 10-year yield would fall below zero and be negative for all years to come, in order to entice buyers to buy at that minuscule yield. And had the yield dropped below zero, those buyers would have made some money – especially those with highly leveraged bets.
Alas, when potential buyers need to be enticed with a lower price, which is what began to happen after August 4, the price of that bond falls and therefore the yield rises, and those who’d bought at the lower yields are losing money. For example, at the most basic unleveraged level, the iShares Treasury Bond ETF [TLT], which tracks Treasury securities with at least 20 years of maturity left, fell 1.24% on Friday and is down 14.3% since August 4.

The 30-year yield rose 7 basis points on Friday to 2.01%, the highest since February 19. The yield has more than doubled from 0.99% on March 9.

The Fed has the short-term Treasury yield locked down near zero, via its various interest rate mechanisms and Treasury purchases. Even the yield of the 2-year note is near zero, at 0.109%. With the short end near zero, and the yield at the longer end rising, the yield curve has steepened.
One of the classic measures of the yield curve, the difference between the 2-year yield and the 10-year yield, widened to 1.1 percentage points on Friday, the widest spread since April 2017. That spread had turned negative briefly in August 2019, when the yield curve “inverted” as the 10-year yield dropped below the 2-year yield.

Mortgage rates went in the opposite direction, but are now having second thoughts.

The average 30-year fixed-rate mortgage rate, which generally tracks the 10-year yield, continued dropping after August 4, even as the 10-year Treasury yield was rising. Finally, in early January, it stopped dropping when it hit 2.65%, and has since ticked up a tiny bit. According to data from Freddy Mac, the weekly average as of February 11 was 2.73%.
This chart of the mortgage rate as per Freddie Mac (blue line) and the 10-year Treasury yield shows the disconnect since last summer. But as weekly numbers, they lack the movements over the past two days, when both have risen:

But Junk bond yields continue to drop from record low to record low.​

The average yield per the ICE BofA US High Yield Index, which tracks US-issued junk bonds across the high-yield spectrum, dropped to 4.09%, the lowest in history, going from new low to the next new low, documenting every day the fabulous bubble going on in the riskiest end of the credit markets.

At the upper end of the junk bond markets, the average yield of bonds in the “BB” category (my cheat sheet of corporate bond ratings), fell to 3.19%, according to the ICE BofA BB US High Yield Index, having fallen from historic low to historic low. That’s what 10-year Treasury securities were yielding in October 2018.
But at the upper end of investment grade, average AA-rated corporate bonds have been slowly following the trend set by Treasury securities, but at a much slower pace, having risen just 25 basis points since August 4.

The Fed…

The Fed appears to be OK with rising long-term Treasury yields. Multiple Fed officials have said that if the higher long-term yields are a sign of rising inflation expectations and economic growth – rather than financial stress – they are welcome. And so they’re allowed to rise.
For the Fed, these increases in the long-term Treasury yields and the continued declines in junk bond yields and the near-record-low mortgage rates are a soothing combination, speaking of inflation and not financial stress.
If the spread of junk bonds and mortgage rates to Treasury securities were to blow out suddenly, that would be a sign of financial stress, and might be more worrisome for the Fed.
So the rat that the Treasury market is smelling is consumer price inflation. It’s gnawing its way through various layers of the economy. And the Fed has said that it will ignore inflation for a “while,” and that it will welcome an overshoot of inflation. Only when it becomes “unwanted” inflation, as Powell put it without specifying what that means, would the Fed crack down.
So maybe the Fed would crack down when inflation stays above 4% or 5% for a “while?” Once inflation has solidly set in, it’s hard to stop. That’s the rat the Treasury market is smelling, and if you’re sitting on a bond that yields 1.2% for the next 10 years, that’s not a mouthwatering item on the menu.

David Goldsmith

All Powerful Moderator
Staff member

David Goldsmith

All Powerful Moderator
Staff member

Global stocks routed as inflation fears dominate​

Global stocks tumbled Friday as a sharp bond selloff encouraged investors to dump riskier assets.
Asian markets followed US stocks lower. Japan's Nikkei 225 (N225) tumbled 4%, while Hong Kong's Hang Seng Index (HSI) closed down 3.6% — that index's worst day in nine months. South Korea's Kospi (KOSPI) dropped 2.8%, while China's Shanghai Composite Index (SHCOMP) lost 2.1%.
European stocks also dropped sharply in early trading. The FTSE 100 (UKX) shed 0.8% in London, while Germany's DAX (DAX) and France's CAC 40 (CAC40) declined by more than 1%.
US stock futures were little changed following heavy losses on Thursday. Dow (INDU) futures added less than 0.1%, while futures for S&P 500 (SPX) and Nasdaq (COMP) were up 0.3%.

Investors around the world are increasingly worried that the wave of pandemic stimulus spending could cause economic growth to accelerate and prices to spike. If inflation takes hold in major economies, central banks could be forced to hike interest rates or curtail asset purchases sooner than expected.

After a long period of easy access to money, that could trigger a market tantrum.

Concerns about higher interest rates are now driving market dynamics, and encouraging investors to dump riskier assets such as tech stocks. Bitcoin prices dropped nearly 4% on Friday, falling below $46,300.

In the United States, the economic outlook has been boosted by the distribution of vaccines, along with the expectation that President Joe Biden will successfully pass a stimulus package through Congress, according to Tai Hui, chief Asia market strategist at JP Morgan Asset Management.

"Investors are now fixated on the risk of inflation and economic overheating," he said.

David Goldsmith

All Powerful Moderator
Staff member

10-year Treasury yield jumps back above 1.5% after Powell comments on inflation​

The 10-year U.S. Treasury yield climbed back above the 1.5% level on Thursday after Fed Chair Jerome Powell said there was potential for a temporary jump in inflation and that he had noticed the recent rise in yields.

The yield on the benchmark 10-year Treasury note rose to 1.541% shortly in afternoon trading. The yield on the 30-year Treasury bond pushed higher to 2.304%. Yields move inversely to prices.


US3MU.S. 3 Month Treasury0.041%+0.0030.00%
US1YU.S. 1 Year Treasury0.081%+0.0020.00%
US2YU.S. 2 Year Treasury0.149%+0.0040.00%
US5YU.S. 5 Year Treasury0.789%+0.0070.00%
US10YU.S. 10 Year Treasury1.563%+0.0130.00%
US30YU.S. 30 Year Treasury2.321%+0.0130.00%
Powell said at the Wall Street Journal jobs summit that the economic reopening could "create some upward pressure on prices." Powell reiterated that the central bank would be "patient" before changing policy even as it saw inflation pick up in what it expects would be a transitory fashion.
The central banker did acknowledge the rapid rise in rates recently caught his attention, but said the Fed would need to see a broader increase across the rate spectrum before considering any action. Yields appeared to move higher after those comments.
The benchmark yield jumped last week, passing both the 1.5% and 1.6% marks to reach its highest level in over a year. The 10-year yield retreated earlier this week, however, and has traded closer to the 1.4% level in recent days.
The 10-year was trading with a yield under 1.0% at the start of the year. Optimism about vaccines, continued federal stimulus and growing concern about inflation have all worked to push bond yields higher in recent months in an unusually rapid move that appears to have rattled the equity markets.
Powell also didn't make a strong hint of any changes in asset purchases by the Fed to contain the rapid increase in rates seen lately, possibly disappointing some investors. Expectations were growing the Fed might implement an "Operation Twist" procedure like it has done in the past where it sells short-term bills and buys longer-duration bonds.

Greg Staples, the head of fixed income North America at DWS, said that Powell was in a tough position as the Fed's stated desire to keep its dovish stance until the economy is near full recovery is contrasted with signs of a strong recovery that could mean some tightening may be a wise choice.

"I don't think that he can reaffirm or even push against the market moves. I think the U.S. Fed is far more reluctant than say the ECB to look at what's going on in the market place, whether it be equity or debt, and say 'this is not where we want it to be,'" Staples said.

"The last thing the Fed wants to do is put themselves in a position where, any time the 10-year sells off by 10 or 15 basis points, they feel like that they have to rush in and buy Treasuries," he added.

The Fed chief said price increases above the Fed's 2% target for a couple quarters or more would not cause consumers' long-term inflation expectations to materially change.

"We have the tools to ensure that long-run inflation expectations are well-anchored at 2%," Powell said.

On the data front, new weekly unemployment insurance claims in the U.S. came in at 745,000 initial claims. Economists surveyed by Dow Jones had projected 750,000 claims.

The initial claims data has improved since the depths of the health crisis and economic restrictions last year, but claims still remain multiples higher than they were in 2019.

Factory orders for January came in at 2.6% growth, beating expectations of 2.3%, according to economists surveyed by Dow Jones.

Auctions were held Thursday for $30 billion of 4-week bills and $35 billion of 8-week bills.

David Goldsmith

All Powerful Moderator
Staff member

10-year Treasury yield rises to roughly 1.6% after Senate passes stimulus package​

  • The Democratic-held House aims to pass the stimulus bill on Tuesday, and send it to President Joe Biden for his signature before a March 14 deadline to renew unemployment aid programs.
  • Auctions were held on Monday for $54 billion of 13-week bills and $51 billion of 26-week bills.

David Goldsmith

All Powerful Moderator
Staff member

Dollar’s Purchasing Power Dwindles to Another Record Low. Fed is Getting its Wishes​

Durable goods inflation +3.3%. Food inflation +3.4%. Services inflation rising, but still held down by battered airline fares, lodging, event tickets, etc. — until people start traveling and going to events again.

The Consumer Price Index rose 1.7% in February from a year earlier, the fastest year-over-year increase in 12 months, picking up speed from the stall in April and May last year. Prices of goods are rising sharply, amid all kinds of shortages of durable goods after stimulus-fed red-hot demand, and food prices are rising too, according to data released by the Bureau of Labor Statistics today.
Price increases for services, the biggie, are held down by the battered discretionary services such as lodging, airline fares, and tickets for sporting and entertainment events, whose sales have collapsed.
  • Durable goods (blue line) account for 10.9% of overall CPI (laptops, new & used cars, appliances, bicycles, etc.)
  • Nondurable goods (green line) account for 26.6% of overall CPI (dominated by food and energy). Spiking & collapsing energy prices caused the larges moves of the index.
  • Services (red line) account for 62.5% of overall CPI (rent, healthcare services, airline tickets, cellphone services, etc.).

CPI for services (red line) rose 1.4% from a year ago, remaining at the lower end of the Pandemic range. This includes rent, homeowner’s equivalent of rent, healthcare services, insurance, but also airline tickets, and haircuts. Over the past decade, it has increased mostly between 2% and 3% year-over-year, but lost steam during the Pandemic as demand for services related to travel, personal care, events, and other areas plunged. For example:
  • CPI airline fares: -25.6%
  • CPI hotels, motels, etc.: -17.2%
  • CPI admission to sporting events: -14.1%
Services, which dominate spending and CPI, is where inflation pressures will make themselves known because services account for two-thirds of the overall CPI.
Parts of the services economy have been hard-hit by the shift in spending from services to goods. And those sectors have responded by slashing capacity – and some purveyors of these services shut down for good. When this shift reverses, as people revert to buying airline tickets, staying at hotels, taking cruises, attending sporting and entertainment events, etc., this renewed demand will meet slashed capacity, creating price pressures that will feed into services CPI.
CPI for nondurable goods (green line) rose 1.7% from a year ago, the steepest increase in 12 months, after having dropped during the Pandemic amid collapsing prices of gasoline and other fuels. This category is dominated by the volatile prices of food and energy.
But gasoline prices are now rising. In February, the CPI for gasoline was up 1.5% from a year ago. And food prices in February rose 3.6%. This includes prices for food at employee sites and schools, where demand has collapsed, and where prices have plunged 24.5%, though I’m not sure how to track prices accurately when so many establishments of this type are closed.
CPI for durable goods (blue line) rose 3.3% from a year ago, remaining near the peak of the Pandemic price spike, amid reports of shortages, backorders, production delays, and transportation bottlenecks, as no one was prepared for the sudden and blistering demand for durable goods since spring.
This surge in durable goods CPI includes the historic four-month spike in used vehicle prices, skyrocketing 15% from June through October, but that is now gradually backing off. The used vehicle CPI was still up 9.3% year-over-year.
The price surge in used vehicles was not a result of blistering retail sales – retail sales of used vehicles have been running below year-over-year levels for nearly the entire Pandemic, including in February, according to data from Cox Automotive.
Instead, the price increases are more likely a result of a change in pricing power at the dealer level, which has been documented by the record surging earnings despite flat unit sales at AutoNation, the largest auto dealer group in the US. And consumers are now willing to pay higher prices – those that can afford to buy.
But the method of how CPI is figured makes sure that, even as used vehicles get more expensive every year, the index value of the CPI for used vehicles, after various ups and downs, has actually fallen since the year 2000, thanks largely to the infamous hedonic quality adjustments.

These infamous hedonic quality adjustments are also used to push down the new vehicle CPI, which has been essentially flat since 1997.
The power of these hedonic quality adjustments is demonstrated by my now equally infamous price index that compares the new vehicle CPI (green line) to prices of the F150, best-selling truck in the US, and the Toyota Camry, best-selling car in the US (I discuss the mechanics of these hedonic quality adjustments on new vehicles in detail here):

The politically incorrect term for consumer price inflation, which is what CPI tracks, is “loss of purchasing power of the consumer dollar,” and thereby the loss of purchasing power of labor denominated in dollars. And the purchasing power of the consumer dollar has dropped to a new all-time low in February, according to the BLS data today:

And now the Fed wants the dollar to lose purchasing power even faster, and thereby the Fed wants the purchasing power of labor to decline along with it. And by the dynamics now transpiring, it looks like the Fed will get its wishes fulfilled.

David Goldsmith

All Powerful Moderator
Staff member

House Price Inflation in CPI is of Course Complete Baloney, but it Accounts for 1/4 of Total CPI

With actual house price inflation based on market data, overall CPI would have jumped by 3.7%. Lifting the cover on the deception to keep CPI low.

For most Americans, housing costs are the largest item in their budget, ranging from 30% to 60% of their total monthly spending. In its Consumer Price Index (CPI) for February, released yesterday, the Bureau of Labor Statistics reported that the costs of homeownership (which the BLS calls “Owner’s equivalent rent of residence”) have increased by just 2.0% from a year ago, and that rents (“rent of primary residence”) have increased by 2.0%. They’re the biggest items among the 211 items in the CPI basket and together account for about one-third of overall CPI. They play a huge role in CPI. So…
Rent inflation of 2.0% year-over-year on average across the US might be roughly on target, from what I can see in other rental data. But homeowner’s inflation of just 2.0%, given the skyrocketing home prices? Ludicrous. In its latest release, the Case-Shiller National Home Price index jumped by 10.4%.
This discrepancy between home price increases and the CPI for homeowners – which has for years contributed to understating the overall CPI – is depicted in the chart of the Case-Shiller National Home Price Index (red line) and the CPI for “owner’s equivalent rent of residence” (black line). I set the homeowners CPI at 100 for January 2000 to match the Case-Shiller index, which is set by default at 100 for January 2000. This allows you to see the progression of both indices on the same axis.

The thus corrected CPI increases by 3.7%.

The “owner’s equivalent rent of residence” accounts for 24.2% of CPI. If it had increased by 10.4%, in line with the Case-Shiller index, instead of 2.0%, the overall CPI would have increased by 2.03 percentage points more. So add the 2.03 percentage points to the reported overall CPI increase of 1.7%. And the thus corrected overall CPI would have shot up by 3.7%!
During the Housing Bust, after five years of dropping, the Case-Shiller Index briefly joined the CPI for homeowners before taking off again – and there is a reason for that we’ll get into in a moment.
The S&P Case-Shiller Home Price index is a good measure of house price inflation because it is based on the “sales pairs” method, comparing the price of a house when it was sold in the current month, to the price of the same house in prior transactions years ago. It also accounts for improvements and removes outliers. In other words, it measures how many dollars it takes to buy the same house over time – and thereby it measures house-price inflation.
This discrepancy – in reality, a form of purposeful deception – between actual home price increases and the CPI for homeownership has been bemoaned before and is not a secret. But it’s not broadly discussed in the media so that everyone knows by just how much the homeownership component in the CPI understates the actual homeownership inflation that Americans confront.
To its credit, the BLS includes homeownership costs in the CPI basket. By contrast, the EU does not include homeownership costs at all in its basket underlying its Harmonised Index of Consumer Prices (HICP). It only includes rent. And thereby housing costs are woefully underrepresented in the EU’s inflation data.
The rationalization put forth by the BLS for this discrepancy is that it doesn’t actually consider house prices relevant for inflation. It considers houses an “investment,” and investments don’t enter into the CPI. What it does try to put a price on is the cost of “shelter,” which is a service. This makes sense with rent. A renter pays for a service. But the BLS extrapolates this rent-as-a-service to homeownership. And that’s where the logic croaks.
The BLS housing inflation data is based on the “Consumer Expenditure Survey” sent to consumers, rather than market data for prices and rents. It’s up to the homeowner to decide what their primary residence would rent for it they tried to rent it out.
This is the question in the survey: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?” So homeowners have to come up with some figure.
For the CPI, the BLS says, the cost of shelter of the owner-occupied home “is the implicit rent that owner occupants would have to pay if they were renting their homes.”
This explains the black line in the chart above that is completely out of tune with the reality of home prices: It tracks rent inflation, not house price inflation, and it essentially represents what homeowners think rents would be. So the rent CPI, which accounts for 7.8% of total CPI, and the homeowner CPI, which accounts for 24.2% of CPI, measure roughly the same thing: rents. And this thereby neatly and purposefully excludes rampant house price inflation from the index. And it also turns CPI into the sad joke that it is

David Goldsmith

All Powerful Moderator
Staff member

Higher Prices Leave Consumers Feeling the Pinch​

Rising costs for everything from fresh fruit to freezers are shaping purchase decisions​

Americans accustomed to years of low inflation are beginning to pay sharply higher prices for goods and services as the economy strains to rev back up and the pandemic wanes.

Price tags on consumer goods from processed meat to dishwashing products have risen by double-digit percentages from a year ago, according to NielsenIQ. Whirlpool Corp. freezers and dishwashers and Scotts Miracle-Gro Co. lawn and garden products are also getting costlier, the companies say. Some consumers are feeling stretched.

Kaitlyn Vinson, a program manager in Denver, said her recent $275 bill at a Costco Wholesale Corp. store, which included razors and cotton pads on top of her typical grocery list, was more expensive than usual. Ms. Vinson said she switched from buying fresh to frozen fruit and vegetables because they are less expensive and last longer.

“We’re sacrificing the food that I really like to cook just to be cheaper,” she said.

Costs are rising at every step in the production of many goods. Prices for oil, crops and other commodities have shot up this year. Trucking companies are paying scarce drivers more to take those materials to factories and construction sites. As a result, companies are charging more for foods and consumer products including foil wraps and disposable cups.

Kellogg Co. , maker of Frosted Flakes, Cheez-Its and Pringles, said Thursday that higher costs for ingredients, labor and shipping are pushing it and other food makers to raise prices. “We haven’t seen this type of inflation in many, many years,” Chief Executive Officer Steve Cahillane said.

Investors and economists are watching whether the higher prices drive up broader measures of inflation, which have been muted for years.

Consumer prices jumped 2.6% in the year ended in March, according to the Labor Department, the biggest 12-month increase since August 2018.

As higher costs ripple through supply chains, more companies are concluding that their customers will accept higher prices. “They’ve seen price increases throughout the entire store,” Whirlpool CEO Marc Bitzer said. “I don’t think anybody is surprised right now.”

Warren Buffett, CEO of Berkshire Hathaway Inc., said during the conglomerate’s annual meeting May 1 that the economy is experiencing a substantial run-up in prices. “We’re raising prices, people are raising prices to us, and it’s being accepted,” Mr. Buffett said. “It’s an economy really that’s red hot, and we weren’t expecting it.”

Federal Reserve Chairman Jerome Powell said on April 28 that inflationary pressures resulting from supply-chain problems would likely be temporary and wouldn’t prompt the central bank to change policies aimed to keep borrowing costs down.

Some manufacturers didn’t pass higher costs along to consumers in the thick of the coronavirus pandemic last year partly because they didn’t want to charge people more for staples during a crisis, said Chris Testa, president of distributor United Natural Foods Inc. Instead, many manufacturers pulled back on discounts. Now, some food and consumer-product makers are raising prices by up to 10%, he said.

Costs for apples are up 10% to 20% depending on the variety, said Mike Ferguson, vice president of produce and floral at Topco Associates LLC, an Elk Grove Village, Ill.-based cooperative of more than 40 food companies including grocer Wegmans Food Markets Inc. Bananas and leafy greens are more expensive too, Topco said, while vegetable oils and oil-heavy products like salad dressing and mayonnaise are also getting pricier in part because of higher ingredient prices.

“Our overall goal is to cover cost increases,” said Jon Moeller, operating chief at Procter & Gamble Co. Procter & Gamble is raising prices on baby products, adult diapers and feminine-care brands.

Competitor Kimberly-Clark Corp. said it would increase prices by mid-to-high single digits on Scott bathroom tissues, Depend adult diapers and Huggies baby-care products.

H. Kenneth Fleetwood, a songwriter in Nashville, said he has shifted to buying more generic staples such as detergent and recently shopped around for a television and monitor for his studio before finding the lowest price at Walmart Inc.

“Penny-pinching is becoming the name of the game,” he said.

Devon Dalton, a sales director in Charlotte, N.C., said he is also buying more store brands and signed up for a fuel-savings program that gives him cash rewards at gas stations after he and his wife recently paid $20,000 more than the listing price to buy their first home.

“Everything is getting a bit tighter,” Mr. Dalton said. “We’re trying to think what would be a good way to stay smart with our money.”

Restaurant prices are rising, too. High demand for wings and a spate of new fast-food chicken sandwiches is pushing up chicken prices. Takeaway containers and coolers are more expensive than usual because production of resin, a key ingredient in plastic, was disrupted by winter storms in the South this year. Chipotle Mexican Grill Inc. said in April that it had raised prices for delivered food by 4%.

Sysco Corp., said that even at higher prices the pent-up demand for restaurants is enormous. “People feel bad for their local restaurants. They want to support them,” he said.

Khisna Holloway, an office manager for a school in Los Angeles, recently ate at a Mexican restaurant with her husband for the first time in more than a year. She noticed her preferred combo of cheese enchilada and chili relleno cost about $4 more than the last time she visited. She didn’t mind.

“It felt like a treat,” she said.

Some people are delaying purchases, hoping prices will recede.

Nick Davison said he bought a graphics card for his computer for about $400 in February 2020. He said similar components now sell for more than $1,000 on eBay. He wants to build a second computer to mine cryptocurrency, but plans to wait to see if component prices decrease.

“It doesn’t seem smart to spend that much money on something that may go down in the future,” he said.

David Goldsmith

All Powerful Moderator
Staff member

Rising Up: Using Escalating Food Costs To Predict Riots, Revolutions, and Rebellions​

Since the beginning of 2014, riots have occurred in countries including Thailand and Venezuela. Although they're different cultures on different continents, these mass protests movements may all have one commonality; increasing food prices may have contributed to their occurrence.

Since the beginning of 2014, riots have occurred in countries including Thailand and Venezuela. Although they’re different cultures on different continents, these mass protests movements may all have one commonality; increasing food prices may have contributed to their occurrence. The cost of food has been steadily increasing in both Thailand and Venezuela; last month demonstrators in Caracas took to the streets marching with empty pots to protest food shortages. According to Dr. Yaneer Bar-Yam and fellow researchers at the New England Complex Systems Institute (NECSI), events such as these may be anticipated by a mathematical model that examines rising food costs.
The events of 2014 aren’t without precedent; the price of food has provoked (and placated) throughout history, beginning in Imperial Rome when Augustus introduced grain subsidies. In recent years, the Middle East has been particularly affected by the cost of grain. Centuries after Egypt developed bread as we recognize it, the nation experienced a bread intifada--the country rioted for two days in January 1977 following Anwar Sadat’s decision to drastically decrease food subsidies. More recently, under the rule of Hosni Mubarak, the price of grain rose 30 percent between 2010 and 2011. Then, on January 25, 2011 a new revolution began in Egypt.

The surging cost of grain throughout the Middle East, along with Tunisian fruit and vegetable vendor Mohammed Bouazizi setting himself on fire on December 17, 2010, are frequently cited as factors contributing to the Arab Spring. Four days prior to Bouazizi’s self immolation, Bar-Yam and his NECSI colleagues submitted an analysis that highlighted the risks of rising food prices and anticipated an event like the Arab Spring. Their research included a model built using data from the United Nations Food and Agriculture Organization’s Food Price Index, a measure that maps monthly changes in international food costs. The model found the likelihood for rioting increased when the index reached above 210.
On the graph below, the black dots are food prices and the vertical red lines are riots (with death tolls in parentheses); they show the index exceeded 210 during the food crises of both the 2008 and 2011.

Of course, man cannot riot off bread alone; factors such as unemployment, oppression, economic instability and corruption also contribute. Still, there is something so fundamental about food, and the implications of not having it, that makes people react. As Bar-Yam explains, “The analysis suggests the doubling of food prices we have seen since 2005 pushed many in the greatest poverty across the line from bare subsistence into desperation and starvation. When people are not able to feed their families, they have little to lose and become willing to take strong actions.”
Bar-Yam has identified two main factors he believes are driving the increasing food prices. The first, conversion of corn for ethanol, is more of an underlying factor. Since 2005, the demand for corn has increased so it can be converted to ethanol and used as gasoline. The other, speculation on food commodities, leads to bubbles and crashes; this occurred in both 2008 and 2011. Both of these factors can be seen on the graph below:

What can be expected for the future? The UN food price index has been at the 210 threshold for nearly two years and reached 213 in March 2014. Along with local conditions and policy decisions that affect food prices, Bar-Yam sees addressing speculation and the conversion of corn to ethanol as essential to determining future conditions. He says, “If actions are taken that reduce the amount of corn being converted to ethanol, prices will decrease, and if there is new regulation of commodity speculation the possibility of another peak will be reduced. However, as it currently stands, we have a very high base price due to ethanol conversion, and speculation may still lead to another bubble causing even more suffering and social unrest.”

Noah Rosenblatt

Talking Manhattan on
Staff member
same thing happened after GFC...Fed prints to stave off deflation/collapse of financial markets --> creates massive search for yield --> creates massive asset and commodity inflation --> higher prices during deflation kills the people and the businesses ---> second deflationary wave hits to bring it all back down to earth before the next cycle.

rinse. lather. repeat as Fed creates boom & bust cycles

David Goldsmith

All Powerful Moderator
Staff member
All it takes to get inflation is for people to expect inflation.

Consumers Expect Surging Inflation to Crush the Purchasing Power of their Labor: Fed’s Survey​

And there are some whoppers.

Consumers are picking up on the rise of inflation, and the Fed, which has been trying to heat up inflation, is pleased. The Fed watches “inflation expectations” carefully. The minutes from the March FOMC meeting mention “inflation expectations” 12 times.
The New York Fed’s Survey of Consumer Expectations for April, released today, showed that median inflation expectations for one year from now rose to 3.4%, matching the prior highs in 2013 (the surveys began in June 2013).
But wait… the median earnings growth expectations 12 months from now was only 2.1%, and remains near the low end of the spectrum, a sign that consumers are grappling with consumer price inflation outrunning earnings growth. The whoppers were in the major specific categories.

The whoppers.

So even as consumers expect their earnings to grow by only 2.1% over the next 12 months, and their total household income by only 2.4%, according to the survey, they expect to face these whoppers of price increases:
  • Home prices: +5.5%, a new high in the data series
  • Rent: +9.5%, fifth month in a row of increases and new high in the data series
  • Food prices: +5.8%
  • Gasoline prices: +9.2%
  • Healthcare costs: +9.1%
  • College education: +5.9%.
Sadly, the Fed doesn’t ask consumers about their expectations for new and used vehicle prices, which are now in the process of spiraling into the stratosphere. It would have been amusing to see what consumers expect those prices to do over the next 12 months.
So consumers expect to pay for these price increases with their earnings that they expect to increase at only a fraction of those price increases. In other words, consumers expect that the purchasing power of their labor will be crushed over the next 12 months.
Higher inflation expectations are associated with consumers being more willing to pay for price increases, rather than go on buyers’ strike. And by not going on buyers’ strike when prices rise, they allow companies to jack up prices, and thereby they allow inflation to run higher, in theory at least, and that is why the Fed is watching inflation expectations so carefully. In theory, they open the door to actual inflation.
Never in my life has the Fed ever been so explicit about purposefully firing up consumer price inflation, and thereby crushing the purchasing power of labor that has to pay for these surging consumer prices. But that’s the Fed we got now, and consumers – though they might not see the Fed or know what it does – are starting to expect these price increases too.

David Goldsmith

All Powerful Moderator
Staff member

Real estate stocks, markets jittery over inflation​

Companies, indexes climbed Friday but could not surmount week’s losses​

Major real estate stocks took a beating this week on concern that rising costs for everything from raw materials to the price of a hotel room could lead to higher interest rates, cutting consumer demand.
A Standard & Poor’s index of homebuilder stocks dropped 4.4 percent for the week, while Lennar, the biggest U.S. homebuilder, dropped almost 8 percent.
Soaring demand for homes during the pandemic had builders working at a furious pace, with housing starts up 20 percent from a year ago and the homebuilder index up 110 percent.

“Double-digit inflation in home prices may freeze first-time buyers out of the market,” said Mike Fratantoni, chief economist of the Mortgage Bankers Association.
Rising inflation could also prompt the U.S. Federal Reserve to raise benchmark interest rates. That would increase the cost of home mortgages and dampen demand in many sectors of the economy.

Prices of consumer goods are 1.4 percent higher now than at the start of March, having risen 4.2 percent in the last 12 months — the largest one-year increase since 2008, according to the Bureau of Labor Statistics.
So far, the Fed has held off on raising rates as the Biden administration pushes multi-trillion dollar stimulus packages to pull the country out of the pandemic-driven downturn. Still, inflation concerns eased a bit on Friday, with some real estate stocks rebounding. The homebuilders’ index rose 1.4 percent on Friday, while the broader S&P 500 rose 1.5 percent.

“I agree with the Fed,” said Fratantoni. “Inflation is likely to be transitory” as the economy comes back to life, “although price spikes may last longer than the word ‘transitory’ suggests.”

The demand for new housing has sent lumber and steel prices on an upward trend, with homebuilders passing the cost on to buyers.
Wage inflation could also add to inflation concerns. As businesses reopen, they are hiring to prepare for pent-up demand, and in some cases raising wages. McDonalds, for example, announced today it would raise wages for its U.S. workers.

The cost of staying in a hotel room rose 8.8 percent during the last two months, according to government figures. Hilton Worldwide Holding eked out a positive week with a gain of 0.17 percent to close Friday at $123.61 per share.
“Consumer confidence in early May tumbled due to higher inflation,” according to Richard Curtain of the University of Michigan’s index of consumer sentiment. “Rising inflation also meant that real income expectations were the weakest in five years.”

That was unwelcome news for retail real estate. Shares in Simon Property Group, the nation’s largest shopping mall owner, fell 2 percent this week to $122.27.
The outlook also remains uncertain for office landlords after a year of working from home.
New York office REIT SL Green fell nearly 2.5 percent this week, with investors valuing the company 26 percent below its pre-pandemic high of $98.68.

Zillow Group fell 5.5 percent, Airbnb fell 6.6 percent after it announced quarterly losses of $1 billion, and CoStar Group closed Friday down nearly 3 percent at $821.90 per share.