Euro Pacific Capital
By: Michael Pento
April 4, 2011
For years the Federal Reserve has told us that in order to detect inflation in the economy it is important to separate “signal from noise” by focusing on “core” inflation statistics, which exclude changes in food and energy prices. Because food and energy figure so prominently into consumer spending, this maneuver is not without controversy. But the Fed counters the criticism by pointing to the apparent volatility of the broader “headline” inflation figure, which includes food and energy. The Fed tells us that the danger lies in making a monetary policy mistake based on unreliable statistics. Being more stable (they tell us), the core is their preferred guide. Sounds reasonable…but it isn’t.
If it were truly just a question of volatility the Fed may have a point. But for headline inflation to be considered truly volatile, it must be evenly volatile both above and below the core rate of inflation over time. If such were the case, throwing out the high and the low could be a good idea. However, we have found that for more than a decade headline inflation has been consistently higher than core inflation. Once you understand this, it becomes much more plausible to argue that the Fed excludes food and energy not because those prices are volatile, but because they are rising.
If you talk about the grand sweep of Fed policy, it’s fairly easy to fix the onset of our current monetary period with the onset of the dot.com recession of 2000. To prevent the economy from going further into recession at that time, the Fed began cutting interest rates farther and faster than at any other time in our history. During the ensuing 11 years, interest rates have been held consistently below the rate of inflation. Even when the economy was seemingly robust in the mid years of the last decade, monetary policy was widely considered accommodative.
Over that time annual headline Consumer Price Index (CPI) data has been higher than the Core CPI 9 out of 11 years, or 81% of the time. Looking at the data another way, over that time frame, the U.S. dollar has lost 20% of its purchasing power if depreciated year by year using core inflation, and 24% if depreciated annually with headline inflation. The same pattern held during the inflationary period between 1977 thru 1980, when the Fed’s massive money printing sent the headline inflation rate well above the core reading. The empirical evidence is abundantly clear. When the Fed is debasing the dollar, headline inflation rises faster than core. The reason for this is clear. Food and energy prices are closely exposed to commodity prices which have a strong negative correlation to the falling dollar that is created by expansionary policies.
Data we have seen thus far in 2011 underscores the need to focus on headline inflation and to avoid the trap of relying on the relatively benign core. The difference between the core rate and headline rate of inflation was .6 percent in January and a full percentage point in February. If annualized those relatively small monthly disparities will become enormous.
It is shocking how few Americans, even those with economic degrees and press credentials, fully appreciate the Fed’s vested interest in reporting low inflation. With benign data in hand, Fed policy makers are given a free hand in adopting stimulative policies. Central bankers who shower liquidity on the economy earn the gratitude of their peers and the thanks of their political patrons. But once a central bank goes down the expansionary path to fight recession it is much easier to keep pumping money than to reverse course when inflation starts to bite into purchasing power.
The sad truth is that the Fed’s record low interest rates are once again causing food and energy prices to rise much faster than core items. Bernanke is focusing on the core just as we need him to focus on the headline. It’s time for the Fed to stop hiding behind flimsy statistical juggling and to start protecting the value of our dollar, which unfortunately is in free fall no matter what statistics one chooses to use.
Showing posts with label CPI. Show all posts
Showing posts with label CPI. Show all posts
Monday, April 4, 2011
Wednesday, January 5, 2011
Global Food Prices AT Record High and Yet U.S. has No Inflation
Ben Bernanke on QE-2: "The Fed needs to take the action
because unemployment is too high and
inflation is too low, signs of a still-troubled economy".
1/5/2011
Its Food Price Index went above the previous record of 2008 that saw prices spark riots in several countries.
Soaring sugar, cereal and oil prices had driven the rise, the report said.
The index, which measures monthly price changes for a food basket composed of dairy, meat and sugar, cereals and oilseeds, averaged 214.7 points last month, up from 206 points in November.
It stood at 213.5 points at the high of June 2008.
However, despite high prices, FAO economist Abdolreza Abbassian said that many of the factors that triggered food riots in 2007 and 2008 - such as weak production in poor countries - were not currently present, reducing the risk of more turmoil.
But he added that "unpredictable weather" meant that grain prices could go much higher, which was "a concern".
Australian floods
Last year a drought forced Russia to suspend wheat exports.
And recent floods in Queensland, Australia are already beginning to hit prices of key exports - which are critical for food supplies to markets in Asia, particularly India, Bangladesh and Japan.
Australia has cut its forecast for sugar exports this year by 25% as flooding has reduced the sugar content of the cane, while wheat crops have also been hit.
The news came amid concerns about inflation in the prices of other key commodities.
The International Energy Agency (IEA) said on Wednesday that the current high price of oil would threaten economic recovery in 2011.
Oil import costs for countries in the Organisation for Economic Co-operation and Development had risen 30% in the past year to $790bn (£508bn), it said.
And copper prices went into 2011 at record highs - in a rally driven by increased demand from the global economic recovery and that fact that most countries are holding low stockpiles.
How to Control Inflation...actually quite simple
(sorry retirees, no Soc. Security Cost of Living Increase)
Wednesday, November 17, 2010
Consumer Price Index recap by Michael Pento (all about owner’s equivalent rent)
Wednesday, November 17, 2010
By: Michael Pento
The facts are that 25% of the Consumer Price Index is derived from owner’s equivalent rent and the BLS substitutes out everything that is increasing in price and then claims that most price increases came from quality enhancements, which are then summarily discounted. Despite those manipulations of the data, the government still reported that consumers paid 1.2% more for goods and services than the previous year. Where is this deflation that the Fed and administration is so concerned about? If one quarter of the CPI measures the rental equivalent derived from a humongous asset bubble that has just popped, it’s simply amazing that the reading on inflation is positive at all.
On the housing front we were treated with some sobering news on just how addicted the U.S. has become to artificially induced growth. I’ve often written about the utter economic devastation that will occur once either the Fed or the market forces interest rates much higher. We had a little taste of this from this week’s mortgage application data.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes loans for home purchases and refinancing, fell 14.4 percent to 713.6 in the week ended November 12, the lowest in four months. Borrowing costs on 30-year fixed-rate mortgages jumped to a two-month high of 4.46 percent in the week, up from 4.28 percent in the previous period.
Therefore, an 18 basis point increase in rates sent mortgage applications tumbling. Just think what will occur to the housing market and the economy in general if I’m correct and the U.S. faces an inexorable rise in interest rates? Those rates may rise well into the double digits due to inflation and a surging supply of debt issuance. Think about that the next time Bush, Geithner or Bernanke takes a victory lap over the “successful” TARP program. I wonder if Mr. Buffett will then write a thank you letter to the NY Times about how government caused America to become an insolvent nation.
Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.
By: Michael Pento
The facts are that 25% of the Consumer Price Index is derived from owner’s equivalent rent and the BLS substitutes out everything that is increasing in price and then claims that most price increases came from quality enhancements, which are then summarily discounted. Despite those manipulations of the data, the government still reported that consumers paid 1.2% more for goods and services than the previous year. Where is this deflation that the Fed and administration is so concerned about? If one quarter of the CPI measures the rental equivalent derived from a humongous asset bubble that has just popped, it’s simply amazing that the reading on inflation is positive at all.
On the housing front we were treated with some sobering news on just how addicted the U.S. has become to artificially induced growth. I’ve often written about the utter economic devastation that will occur once either the Fed or the market forces interest rates much higher. We had a little taste of this from this week’s mortgage application data.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes loans for home purchases and refinancing, fell 14.4 percent to 713.6 in the week ended November 12, the lowest in four months. Borrowing costs on 30-year fixed-rate mortgages jumped to a two-month high of 4.46 percent in the week, up from 4.28 percent in the previous period.
Therefore, an 18 basis point increase in rates sent mortgage applications tumbling. Just think what will occur to the housing market and the economy in general if I’m correct and the U.S. faces an inexorable rise in interest rates? Those rates may rise well into the double digits due to inflation and a surging supply of debt issuance. Think about that the next time Bush, Geithner or Bernanke takes a victory lap over the “successful” TARP program. I wonder if Mr. Buffett will then write a thank you letter to the NY Times about how government caused America to become an insolvent nation.
Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.
Monday, October 11, 2010
Senior citizens brace for Social Security freeze..Nice hack job on the U.S. Dollar Bernanke
It is absolutely appauling that our senior citizens are once again kicked to the curb. Bernanke's monetary policies have crushed and continue to crush the U.S. Dollar and each new U. S. Government administration strategically designs new manipulation tools when calculating real inflation and somehow they actually sleep at night knowing the impact this has on our senior citizens.
It is a disgrace that the generations who built this country, saved money, did not pass along a gargantuan debt burden to their grandchildren and paid off their mortgages are treated with less respect and caring than caged animals in a zoo.
By Matt Sedensky
Associated Press
10/11/10
BOCA RATON, Fla. – Seniors prepared to cut back on everything from food to charitable donations to whiskey as word spread Monday that they will have to wait until at least 2012 to see their Social Security checks increase.
The government is expected to announce this week that more than 58 million Social Security recipients will go through a second straight year without an increase in monthly benefits. This year was the first without an increase since automatic adjustments for inflation started in 1975.
"I think it's disgusting," said Paul McNeil, 69, a retired state worker from Warwick, R.I., who said his food and utility costs have gone up, but his income has not. He lamented decisions by lawmakers that he said do not favor seniors.
"They've got this idea that they've got to save money and basically they want to take it out of the people that will give them the least resistance," he said.
Cost-of-living adjustments are automatically set by a measure adopted by Congress in the 1970s that orders raises based on the Consumer Price Index, which measures inflation. If inflation is negative, as in 2009 and 2010, payments remain unchanged.
Still, seniors like McNeil said they'll be thinking about the issue when they go to vote, and experts said the news comes at a bad time for Democrats already facing potentially big losses in November. Seniors are the most loyal of voters, and their support is especially important during midterm elections, when turnout is generally lower.
"If you're the ruling party, this is not the sort of thing you want to have happening two weeks before an election," said Andrew Biggs, a former deputy commissioner at the Social Security Administration and now a resident scholar at the American Enterprise Institute.
At St. Andrews Estates North, a Boca Raton retirement community, seniors largely took the news in stride, saying they don't blame Washington for the lack of an increase. Most are also collecting pensions or other income, but even so, they prepared to tighten their belts.
Bette Baldwin won't be able to travel or help her children as much. Dorcas Eppright will give less to charity. Jack Dawson will buy cheap whiskey instead of his beloved Canadian Club.
"For people who have worked their whole life and tried to scrimp and save and try to provide for themselves," said Baldwin, a 63-year-old retired teacher, "it's difficult to see that support system might not sustain you."
Baldwin and her husband mapped out their retirements, carefully calculating their income based on their pensions and Social Security checks. Trouble is, they expected an annual cost-of-living increase.
"When we cut back, we're cutting back on niceties," Baldwin said. "But there are other people that don't have anything to cut back on. They're cutting back on food and shelter."
Many at St. Andrews said the cost-of-living decision won't affect who they vote for next month. But seniors tied the Social Security issue to what they see as a larger societal problem with debt, entitlements and hopefulness for the future.
"I'm kind of glad in a way," Stella Wehrly, an 86-year-old retired secretary, said of the freeze. "One thing depends on the other and when people aren't working there's not enough people feeding into the Social Security system."
Wehrly and her husband, Hank, said curtailing government spending is necessary to maintain the Social Security system.
"We have a generation now that we're not going to leave a very good legacy for," she said.
Jack Dawson, 77, said the freeze is the right move considering the state of the government and the American economy.
"Who would be surprised what's happened?" he asked. "I feel this is the right decision in light of the malaise."
More than 58.7 million people rely on Social Security checks that average $1,072 monthly. It was the primary source of income for 64 percent of retirees who got benefits in 2008; one-third relied on Social Security for at least 90 percent of their income.
At the Phoenix Knits yarn shop in Phoenix, 73-year-old owner Pat McCartney said she already worries about paying for utilities, groceries and gas. Not having the increase makes her worry even more.
"If I have any major expense, I don't know what I'll do," McCartney said while helping customers with their knitting. "I live on Social Security."
In Kansas City, Mo., Georgia Hollman, 80, said Social Security is her sole source of income. She would have liked a bigger check, but said she's grateful for what she gets.
"There isn't nothing I can do about it but live with it," she said. "Whatever they give us is what we have to take. I'm thankful we get that little bit."
Advocates for seniors argue the Consumer Price Index doesn't adequately weigh the costs that most affect older adults, particularly medical care and housing.
"The existing COLA formula does not account for the economic reality of the true costs that most seniors faced," said Fernando Torres-Gil, director of UCLA's Center for Policy Research on Aging and the first person appointed to the governmental post of assistant secretary for aging, during the Clinton administration.
Still, Torres-Gil said the political reality is different, and many feel seniors are lucky to have their checks determined by the CPI, instead of some new formula that might make it even harder to secure a raise.
"We may just lucky to keep the current index," he said.
It is a disgrace that the generations who built this country, saved money, did not pass along a gargantuan debt burden to their grandchildren and paid off their mortgages are treated with less respect and caring than caged animals in a zoo.
By Matt Sedensky
Associated Press
10/11/10
BOCA RATON, Fla. – Seniors prepared to cut back on everything from food to charitable donations to whiskey as word spread Monday that they will have to wait until at least 2012 to see their Social Security checks increase.
The government is expected to announce this week that more than 58 million Social Security recipients will go through a second straight year without an increase in monthly benefits. This year was the first without an increase since automatic adjustments for inflation started in 1975.
"I think it's disgusting," said Paul McNeil, 69, a retired state worker from Warwick, R.I., who said his food and utility costs have gone up, but his income has not. He lamented decisions by lawmakers that he said do not favor seniors.
"They've got this idea that they've got to save money and basically they want to take it out of the people that will give them the least resistance," he said.
Cost-of-living adjustments are automatically set by a measure adopted by Congress in the 1970s that orders raises based on the Consumer Price Index, which measures inflation. If inflation is negative, as in 2009 and 2010, payments remain unchanged.
Still, seniors like McNeil said they'll be thinking about the issue when they go to vote, and experts said the news comes at a bad time for Democrats already facing potentially big losses in November. Seniors are the most loyal of voters, and their support is especially important during midterm elections, when turnout is generally lower.
"If you're the ruling party, this is not the sort of thing you want to have happening two weeks before an election," said Andrew Biggs, a former deputy commissioner at the Social Security Administration and now a resident scholar at the American Enterprise Institute.
At St. Andrews Estates North, a Boca Raton retirement community, seniors largely took the news in stride, saying they don't blame Washington for the lack of an increase. Most are also collecting pensions or other income, but even so, they prepared to tighten their belts.
Bette Baldwin won't be able to travel or help her children as much. Dorcas Eppright will give less to charity. Jack Dawson will buy cheap whiskey instead of his beloved Canadian Club.
"For people who have worked their whole life and tried to scrimp and save and try to provide for themselves," said Baldwin, a 63-year-old retired teacher, "it's difficult to see that support system might not sustain you."
Baldwin and her husband mapped out their retirements, carefully calculating their income based on their pensions and Social Security checks. Trouble is, they expected an annual cost-of-living increase.
"When we cut back, we're cutting back on niceties," Baldwin said. "But there are other people that don't have anything to cut back on. They're cutting back on food and shelter."
Many at St. Andrews said the cost-of-living decision won't affect who they vote for next month. But seniors tied the Social Security issue to what they see as a larger societal problem with debt, entitlements and hopefulness for the future.
"I'm kind of glad in a way," Stella Wehrly, an 86-year-old retired secretary, said of the freeze. "One thing depends on the other and when people aren't working there's not enough people feeding into the Social Security system."
Wehrly and her husband, Hank, said curtailing government spending is necessary to maintain the Social Security system.
"We have a generation now that we're not going to leave a very good legacy for," she said.
Jack Dawson, 77, said the freeze is the right move considering the state of the government and the American economy.
"Who would be surprised what's happened?" he asked. "I feel this is the right decision in light of the malaise."
More than 58.7 million people rely on Social Security checks that average $1,072 monthly. It was the primary source of income for 64 percent of retirees who got benefits in 2008; one-third relied on Social Security for at least 90 percent of their income.
At the Phoenix Knits yarn shop in Phoenix, 73-year-old owner Pat McCartney said she already worries about paying for utilities, groceries and gas. Not having the increase makes her worry even more.
"If I have any major expense, I don't know what I'll do," McCartney said while helping customers with their knitting. "I live on Social Security."
In Kansas City, Mo., Georgia Hollman, 80, said Social Security is her sole source of income. She would have liked a bigger check, but said she's grateful for what she gets.
"There isn't nothing I can do about it but live with it," she said. "Whatever they give us is what we have to take. I'm thankful we get that little bit."
Advocates for seniors argue the Consumer Price Index doesn't adequately weigh the costs that most affect older adults, particularly medical care and housing.
"The existing COLA formula does not account for the economic reality of the true costs that most seniors faced," said Fernando Torres-Gil, director of UCLA's Center for Policy Research on Aging and the first person appointed to the governmental post of assistant secretary for aging, during the Clinton administration.
Still, Torres-Gil said the political reality is different, and many feel seniors are lucky to have their checks determined by the CPI, instead of some new formula that might make it even harder to secure a raise.
"We may just lucky to keep the current index," he said.
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