Tuesday, May 18, 2010

Worldwide Inflation Data Reveals Building Pressure

New data for inflation for the U.K. and U.S. was released this morning.  As has been the case since the beginning of the financial crunch, reported data for the U.S. continues to suggest that inflation is tame.  This, of course, is at odds with real life experience, which suggests the opposite.

The Producer Price Index (PPI) edged lower 0.1% last month, the second decline in the past 3 months, the Labor Department said Tuesday.  Core inflation, which excludes energy and food rose 0.2%, slightly faster than expected.  But over the past year, core prices are up just 1%.  Core prices, an invention of the government, are hardly representative of anecdotal experience since they assume that no one eats or drives.

For April, food costs dipped by 0.2%.  It was the first decline in 9 months and came after a 2.4% surge during the previous month - the largest gain in 26 years.  The March increase reflected the impact of a winter freeze in Florida that heavily damaged citrus and vegetable crops.  Energy prices fell 0.8% in April with gasoline prices down 2.7%.

In the U.K., the reported numbers were far less sanguine.

Inflation leapt to 3.7% in April, significantly higher than expected, prompting a letter of explanation from the governor of the Bank of England to the new Chancellor George Osborne.

The annual inflation rate of the British Consumer Price Index (CPI) was up from 3.4% in March and well above the Bank’s 2% target.  Economists had projected inflation to hit 3.5% this month.

The retail price index measure of inflation jumped even higher to 5.3% in April from 4.4% in March and reached its highest since 1991.  The retail price index is used as a benchmark for many public sector contracts, benefits payments and wage settlements.

The further rise in inflation will prove sticky for the Bank of England.  Interest rates are still at 0.5% and the Bank pumped £200 billion in newly created cash into the economy to fight the recession.

This news comes after many Asian countries are also experiencing various aspects of inflation - especially in the form of what appears to be housing bubbles.  The housing price escalation is particularly prevalent in China and Australia.  We have written two very recent blogs on the issues which can be reviewed by clicking http://markostake.blogspot.com/2010/05/asian-inflation-contagion.html and http://markostake.blogspot.com/2010/05/rising-chinese-inflation-augurs-well.html.

One has to remain vigilant as to the accuracy of inflation data as reported by the Labor Department.  As we've also pointed out in various pieces, the methodology for computing the CPI has been altered several times since the beginning of the Clinton Administration.  The effect of these alterations has been to substantially reduce the reported number.  According to Shadow Stats (http://www.shadowstats.com/), the CPI would be reported at closer to 6% if the pre-Clinton methodology was still employed today.

The important thing to keep in mind is that the PPI and CPI are not necessarily indicative of what any individual will actually experience.  A better measure is to review your outflows and compare them to the past.  If your expenses are rising at 10%, then a tame CPI or PPI is completely irrelevant.

It's inevitable that even the reported numbers will start to creep higher and this should occur in the very near future.  The most objective measure of inflation expectations is the GOLD market, which continues to surge to new all-time highs.  If that market screams INFLATION, why isn't Uncle Sam listening?

Marko's Take

Some websites we like and urge you to check out are the following:  LeMetropole Cafe (http://www.lemetropolecafe.com/) and Shadow Stats (http://www.shadowstats.com/).  Both of these sites, like us, only deliver the unvarnished truth - a rare commodity these days.

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