Wednesday, July 16, 2008

Recession Zombies and Inflation Doomsayers

One of my favorite daily reads and sometimes video cast watch is Chart Pattern Trader.

The CPI inflation data came out today and was much higher than previously forecasted. The headline inflation rate for CPI came in at 5.0 % rising by 1.1%. While core CPI inflation rose by .3% and came in at 2.4%. What is driving the headline number up is that energy has risen 24.7% year over year, while food has increased by 5.2 and transportion rose by 12%. I find that the CPI inflation always overstates inflation and I agree with them that the PCE inflation rate is much more accurate. That all inclusive rate is at 3.1% , while core PCE is at 2.1%.

The CPI data tends to overstate inflation. Why? Many economist believe that CPI is not merely a vehicle for measuring inflation , but it could be part of the inflation problem. And as a lay economist I agree with that assessment. Millions of union employees get COLAs in their collective bargaining agreements. When prices rise, their wages automatically increase to further fuel inflation. Moreover, CPI assumes that all of the increase in the move or nominal value of the market basket is due solely to inflation rather than quality improvements. It is because of these reasons that I personally find the PCE data much more accurate and reliable. But the recession zombies and the inflation doomsdayers sure had fun with a 5.0% headline inflation number today. It is interesting that the market rallied and ignored the data and their prophesies of Armageddon.


You know, there aren't many folks left out there who are paying attention to the PCE.  The PCE is said to be the Fed's favorite indicator, yet the Fed is out jawboning inflation morning, noon and night.  I'm not seeing much inflation in my daily life, outside of energy.  Except...  When the minimum wage went up in CA, the fast-food places immediately raised their prices.

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