Inflation Twitches, Blinks Eyes...

Tim Cavanaugh | July 14, 2009

The Producer Price Index for Finished Goods rose 1.8 percent in June, the Labor Department reports. That's a big step up from a 0.2 percent increase in May and a 0.3 percent increase in April. 

But it's not enough to qualify as inflation to Bernard Baumohl of the Economic Outlook Group. "We're experiencing deflation still," Baumohl tells The New York Times. "That's largely because U.S. and international economies are so very weak."

Jon C. Ogg of 247wallst.com gave a closely argued pre-release writeup on the PPI:

Because oil was much higher and because the bias through much of June was still bullish in oil, tomorrow's figure could be a false alarm for the inflation hawks.  If that number comes in much lighter then expected, then it is going to give the inflation hawks even less of a basis for all the fears that prices were heading through the roof any time soon.  The big rise in oil was in May when prices at the end of April went from the mid-$50's up into the $70's by June.  As there is a lag on that, we won't be shocked if a higher number on the headline PPI is the result.  But the trend in oil rigs is already contracting again, and that does not lend much credibility to the notion of suddenly higher oil prices nor that of a sudden return of demand.

Another notion to consider is that, even with a one-week figure of sub-600K job losses, the shrinking confidence of CEOs, shrinking consumer expectations, and a growing unemployment will continue to offset all that hypothetical new printed money for some time.

The PPI increase came in at about double expectations after that was written.

In other infation-indicator news, retail sales increased at an anemic 0.6% May to June. That leaves retail sales down 9.6% from June 2008. A Calculated Risk graph puts that figure into grim context.

Housekeeping note: I write with the bias that everybody in the Fed, Treasury and the White House is trying to spark inflation like Jack London trying to get a fire started by burning pages from Das Kapital. So in fairness, I should note that they always say they aren't pursuing per se pro-inflation policies.

That said, be on the lookout in coming days for these numbers to be vaguely alluded to as Rays of Hope or described in some similar term of vagueness. (I'm fairly sure "green shoots" has been retired to punchline status. Might I suggest "financial fungi" or "pecuniary peatmoss" as a replacement?)

Comments

|7.14.09 @ 7:11PM|#

Excellent reference to one of the all-time best short stories: To Build A Fire by Jack London.

Tim Cavanaugh|7.14.09 @ 7:29PM|#

...and I was this close to replacing that with "like a bugeyed Colin Clive quivering over the body of Boris Karloff," to keep it consistent with the title ref.

|7.14.09 @ 7:37PM|#

You can't double the money supply chasing roughly the same basket of goods without, eventually, halving the purchasing price of the dollar.

Don't hold a lot of cash. Own something real.

Flex Nasty B.I.G.|7.14.09 @ 7:39PM|#

Yes, but has the money supply really doubled? How can one tell? Should I look at M0, M1, M2, or MZ? I don't entirely understand which one best represents the "number of dollars in circulation."

|7.14.09 @ 7:50PM|#

They doubled the money supply, but it's not all in circulation yet. As soon as the economy bottoms out and the money starts being spent than we'll have some real inflation.

|7.14.09 @ 8:30PM|#

I am waiting for hyperinflation to hit before I pay off my student loans in a lump sum.

Flex Nasty B.I.G.|7.14.09 @ 8:45PM|#

hey doubled the money supply, but it's not all in circulation yet.

Who is "they" and how do you know the above? Yes, we have a huge debt and deficit, but as far as I know we're not printing more money to cover those. Rather, we're just borrowing money from the Chinese, at interest.

So, the actual inflation would not occur until some hypothetical future date when we print more money to cover our debt to the Chinese. Right?

I hear all sorts of "inflation is coming!" freakouts from libertarians. It's all the Lew Rockwell crowd ever talks about - or has talked about for years. "The Fed is flooding the market with excess paper money" they say. But, I have yet to see any actual evidence of that. What gives?

SIV|7.14.09 @ 9:10PM|#

I know when to start worrying about inflation.Large and/or regular "stimulus" checks will start hitting the mailbox (or direct deposit).Until then it is deflation or "disinflation".

|7.14.09 @ 9:16PM|#

Flex,
The Federal Reserve prints up new money to "buy" our treasury bills. Hence, the deficit spending is partially borrowing from Asia and partially printed money. They also print money and lend it to private banks for 0.25% or whatever it is now. The Fed either sells assets or prints money in order to spend money. They ain't selling anything these days.

I'm sure the hyperinflation fears are a bit overstated, but it's not unrealistic to expect high single digit inflation at this point.

Flex Nasty B.I.G.|7.14.09 @ 9:35PM|#

Franco,

Thanks for explaining that. I still don't grok it fully, but it makes a bit more sense. I mean, it's stupid, but I understand the mechanism better.

Flex Nasty B.I.G.|7.14.09 @ 9:46PM|#

OK, so here's another question: is this graph worth freaking out over? Or is there some innocuous explanation for that giant spike?

|7.14.09 @ 10:37PM|#

I'm certainly not seeing any inflation with my interest-paying checking account at Chase. I just discovered that the annual percentage rate has been adjusted down to .01%....

|7.14.09 @ 11:59PM|#

I am a huge fan of the Friedman but from a real world view and can't think of anyone who is considering raising prices today.

We have so much excess capacity that most of everthing is buy is 10% to 20% cheaper then a year ago (I renogotiated with employees, landlords, vendors, housecleaners, gardners, etc.... for this discount with little resistence).

Yes, our drunken sailor spending will eventually cause inflation but that is 1yr to 3yrs off.

Tim Cavanaugh|7.15.09 @ 12:06AM|#

The Federal Reserve prints up new money to "buy" our treasury bills.

You're saying "prints up new money" figuratively, right? It's the Treasury that prints the money. The Fed is theoretically self-financing, as it collects interest on the government securities it buys. (The other rule of thumb is that the Fed's buying of treasuries is inflationary, because it delivers money to the primary dealers' banks; selling them is deflationary, as it reduces the amount of funds in the banks.)

This is all how the Fed describes its own operations, so I don't vouch for it. But I don't think it's correct to say the Fed prints money. (Though it may be spending money it doesn't have for the Treasuries, making it sort of a distinction without a difference.)

Flex Nasty B.I.G.|7.15.09 @ 12:50AM|#

Would love it if I could find an animation which illustrate the mechanics of all that. Maybe a good topic for a Reason.tv clip :-)

Tsunami|7.15.09 @ 8:24AM|#

is this graph worth freaking out over?

DEFINITELY

It is unprecedented. Analog equivalent would be the shoreline receding 100m in 10 minutes.... it can only mean a Tsunami is on its way.
When?
SOON.

roy|7.15.09 @ 8:28AM|#

"Tsunami is on its way."

now, if you ask me where it's gonna hit... no idea. MONEY IS FUNGIBLE. It could manifest itself in CPI, PPI, commodity prices, stocks, forex.... but watch the water and start running for high ground now.

MoM CPI|7.15.09 @ 8:33AM|#

US MoM CPI... +0.7% vs. +0.6% expected.

expecte inflation to stabilize over summer, jump in Q4.

Hyperinflation Nation|7.15.09 @ 8:42AM|#

Hyperinflation Nation starring Peter Schiff, Ron Paul, Jim Rogers, Tom Woods, Gerald Celente.....