Another Sign of Global Deflation

[kcowan]

Much of the lack of inflation is helped by the oil supply from Saudi Arabia, Iran and Venezuela. Once OPEC has bankrupted all the fracking companies, expect a return to higher prices. But we are probably talking about 3+ years.

 

[MichaelB]

My how things change. That second peak in early 2000's was when US was running budget surpluses. They had projections showing the US being debt free about now. Also, they were worried about how all US debt being paid off would affect world economies and dollar value. Well, I guess we don't have to worry about that scenario for a while.


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No expertise here, but I think currency has less to do with budget surplus and more to do with the relative economic performance among countries, at least when dealing with strong currency.

I agree, but if the Fed has another 3-4 rate increases this year, another 1-2%, we will likely be higher than the highest peak.

I think we are done with rate increases until inflation starts. The Fed had to raise rates to save face, and allow banks to have higher profits.

I gave my policy recommendation to Janet but she asked me not to share it.

The Fed is usually in a no-win situation, and this is no different. They must act with certainty of that which has not yet happened, yet will be judged based on the history of what did happen.

- It is never the right time to raise rates. That moment is either not yet come or already past.
- There are always important constituencies that benefit while others suffer no matter what the Fed does.
- While the Fed has two mandates, they are liable for and judged by a third, which is the misallocation of capital that takes placce when money is too easy for too long.
- Many of the financial issues we face today are due to past policies that attempt to minimize the downside of economic cycles.
- Most of us have benefited enormously from the asset appreciation over the past decade, and decades.

If other policy makers around the world developed and implemented their policies with the same care, skill, and forethought, I think most of the world would be in better shape.

 

[Mulligan]

No expertise here, but I think currency has less to do with budget surplus and more to do with the relative economic performance among countries, at least when dealing with strong currency.


I gave my policy recommendation to Janet but she asked me not to share it.

The Fed is usually in a no-win situation, and this is no different. They must act with certainty of that which has not yet happened, yet will be judged based on the history of what did happen.

- It is never the right time to raise rates. That moment is either not yet come or already past.
- There are always important constituencies that benefit while others suffer no matter what the Fed does.
- While the Fed has two mandates, they are liable for and judged by a third, which is the misallocation of capital that takes placce when money is too easy for too long.
- Many of the financial issues we face today are due to past policies that attempt to minimize the downside of economic cycles.
- Most of us have benefited enormously from the asset appreciation over the past decade, and decades.

If other policy makers around the world developed and implemented their policies with the same care, skill, and forethought, I think most of the world would be in better shape.

That is my general understanding as well. I just, like always, go off on a separate and unrelated tangent at the same time.


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[winger]

I love predictions.

 

[Hamlet]

I agree, but if the Fed has another 3-4 rate increases this year, another 1-2%, we will likely be higher than the highest peak.

I think we are done with rate increases until inflation starts. The Fed had to raise rates to save face, and allow banks to have higher profits.

Yeah, I can't see the Fed raising rates further with the current global situation and inflation and growth as low as they are. Of course, I thought they should have waited longer before their first rate increase, so what do I know.

 

[VFK57]

With almost $19 trillions in Debt, chronic big budget deficit, Q4 GDP sharp slow down I do not understand how the Feds are going to continue rates raising.

 

[RAE]

I think we are done with rate increases until inflation starts. The Fed had to raise rates to save face, and allow banks to have higher profits.

Agreed. I don't think we will see another rate increase anytime soon either. The recent minor rate increase was not justified (based on the state of the economy), but they had to do it to save face, as you say. The Fed (and especially Janet Yellen) is in a real quandary here, because Bernanke put them in a real tough situation (with QE 1,2,3, ZIRP, etc), from which there is no easy way out now.

 

[ERD50]

I love predictions.

I predict that in the future, you won't.

-ERD50

 

[mh]

I think it will be stagnation more so than deflation, at least in the US.



I think the US will go through what Japan had endured the last few decades.

People have been saying this for ten years though.


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[Ed_The_Gypsy]

Pretty sure all you have to do is leave the country for a few days and return. Italy is just a short drive away and the food is good!

Schengen Zone. The drive is a little longer than that.

 

[Ed_The_Gypsy]

I am not clear where deflation may be found. In my little town, except for gasoline, the cost of most things is increasing.

 

[Senator]

I am not clear where deflation may be found. In my little town, except for gasoline, the cost of most things is increasing.

Sometimes, deflation is hard to see. Cars have the same list price, bu have higher discounts. Gas prices are way down. Things purchased on-line eliminate many stages of mark-ups and are cheaper. Things can be purchased directly from Hong Kong, for pennies on the dollar, and are much cheaper.

Companies in the S&P top-line revenue growth is always struggling. Consumer spending, and wages, are stagnant. Do not look to tech workers wages, look to the average worker, without an education.

Deflation is here. When people cannot spend more, or refuse to do so, it happens.

 

[Gone4Good]

Schengen Zone. The drive is a little longer than that.

And then you still can't come back for 90 days.

 

[highlow65]

I think it will be stagnation more so than deflation, at least in the US.

I think the US will go through what Japan had endured the last few decades.

While stagflation is a horrible thing for economy, not a bad thing for retirees who already have their $$$$

 

[Chuckanut]

While stagflation is a horrible thing for economy, not a bad thing for retirees who already have their $$$$

In the short run I might agree. In the long run we need profitable businesses and working people making a descent wage to buy our investments when we sell them, help investments throw off increasing dividends, as well as contribute to our pensions, SS, Medicare, etc.

 

[photoguy]

I checked out the latest CPI-U numbers and was surprised to see food at home is actually down -0.4% for 2015. Food inflation has been a big complaint on this board...

 

[Mulligan]

I checked out the latest CPI-U numbers and was surprised to see food at home is actually down -0.4% for 2015. Food inflation has been a big complaint on this board...

I think it has moderated a bit recently especially beef. But, CPI-U if I remember correctly ( never count on that) always assumes you will substitute some foods when price is higher on another product. Grocery bill is less than 10% of my monthly income so I shouldn't get too worked up over it anyways.


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[audreyh1]

I think it has moderated a bit recently especially beef. But, CPI-U if I remember correctly ( never count on that) always assumes you will substitute some foods when price is higher on another product. Grocery bill is less than 10% of my monthly income so I shouldn't get too worked up over it anyways.


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No, I don't believe CPI-U actually substitutes foods as in substituting something else for beef.

It does not assume, however, substitution between steak and chicken or between cars and bus fare.

Consumer Price Index data quality: how accurate is the U.S. CPI? : Beyond the Numbers: U.S. Bureau of Labor Statistics

 

[Mulligan]

No, I don't believe CPI-U actually substitutes foods as in substituting something else for beef.



Consumer Price Index data quality: how accurate is the U.S. CPI? : Beyond the Numbers: U.S. Bureau of Labor Statistics

Thanks, Audrey. Dang almost made it through the day without being wrong on something. That would have been a personal milestone! I hit one of the links from your article and I read that I fell victim to "one of the 4 myths of the CPI." Substitution was one of the four. I wonder where I got that idea from, because I know I wasn't smart enough to just make it up myself.


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[audreyh1]

Thanks, Audrey. Dang almost made it through the day without being wrong on something. That would have been a personal milestone! I hit one of the links from your article and I read that I fell victim to "one of the 4 myths of the CPI." Substitution was one of the four. I wonder where I got that idea from, because I know I wasn't smart enough to just make it up myself.

It's a common and persistent myth. Just like the myth that the CPI-U does not include food or energy.

 

[Gone4Good]

Food inflation has been a big complaint on this board...

Only when it goes up. No one notices when it goes down.

 

[Gone4Good]

Thanks, Audrey. Dang almost made it through the day without being wrong on something. That would have been a personal milestone! I hit one of the links from your article and I read that I fell victim to "one of the 4 myths of the CPI." Substitution was one of the four. I wonder where I got that idea from, because I know I wasn't smart enough to just make it up myself.

Yup, the nerds at BLS make a pretty good effort at an impossible job - tracking inflation. They're not perfect, but if you hear someone claiming that the government is making some kind of unreasonable adjustment to CPI, it's usually safe to assume it's not the BLS that is being unreasonable.

 

[photoguy]

But, CPI-U if I remember correctly ( never count on that) always assumes you will substitute some foods when price is higher on another product.

No, I don't believe CPI-U actually substitutes foods as in substituting something else for beef.

I think the "substitution" issue is confusing because while CPI-U doesn't allow broad substitution like chicken for steak, I believe it does allow for some substitution within a specific category. E.g one kind of steak for another cut of steak. (Chained CPI, a different measure, does allow for steak to chicken substitution).

From the BLS link:

In 1999, BLS changed the way it calculated the CPI for many of the basic indexes, moving from a Laspeyres formula to a geometric means formula. (A basic index is an index for a particular item category and location; these basic indexes are the building blocks that are aggregated into the broader CPI measures, such as the all items index.) This new formula effectively presumes modest consumer substitution within item categories, correcting for what the Boskin Report termed “lower-level substitution bias.” That is, it assumes that consumers will substitute away from one brand or type of item, such as a steak or a car, as that brand or type becomes relatively more expensive compared with other brands or types of that product. It does not assume, however, substitution between steak and chicken or between cars and bus fare.

It's a little confusing to follow, but I believe it's because they switched from an arithmetic mean to a geometric mean. This has the effect of downweighting inflation in higher priced goods (or equivalently substituting more lower priced goods). But they limit the substitution effect to within a specific category (like different types of steak or different types of ice cream). Even more confusing, I just read that they were planning to revert back to the arithmetic mean in some categories (like prescriptions) where they think the substitution effect isn't significant.


I think a huge drawback of the BLS methodology is that it is hard to follow and is not calculated in fashion that most people would compute inflation (although I do buy the arguments that it is a better measure overall).

 

[Mulligan]

I think the "substitution" issue is confusing because while CPI-U doesn't allow broad substitution like chicken for steak, I believe it does allow for some substitution within a specific category. E.g one kind of steak for another cut of steak. (Chained CPI, a different measure, does allow for steak to chicken substitution).



From the BLS link:







It's a little confusing to follow, but I believe it's because they switched from an arithmetic mean to a geometric mean. This has the effect of downweighting inflation in higher priced goods (or equivalently substituting more lower priced goods). But they limit the substitution effect to within a specific category (like different types of steak or different types of ice cream). Even more confusing, I just read that they were planning to revert back to the arithmetic mean in some categories (like prescriptions) where they think the substitution effect isn't significant.





I think a huge drawback of the BLS methodology is that it is hard to follow and is not calculated in fashion that most people would compute inflation (although I do buy the arguments that it is a better measure overall).

Well at least I wasn't totally making it up. I read a little deeper into a link from Audreys article, that it allows for some small degree of substitution, but specifically said it didn't "substitute hamburger for steak". Some pretty intense formulas beyond my abilities...


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[sengsational]

I would think deflation would benefit those who have cash or long bonds, but not equity investors. I've not done any reading on it, but if I could buy more next year with the money in my matress than I can now, that seems like a good thing. If, instead of the mattess, I'm invested in equities, then I'd expect the market would be down (not a lot of buyers in a down economy), so not a good thing for the equities investor.

But it will never happen. Those that have tons of debit (governments) need to inflate, because thats the only way they'll be able to service the huge debit they have racked-up; they need to pay off that borrowing with cheap dollars. The spread between inflation and the artificially controlled interest rates is a stealth tax on savers that is helping to wear down the mountain of debit. I guess I'm in a bad mood after doing a capital gains calculation with no allowance for inflation... I basically didn't make anything, but still am having to pay tax on the phantom gains.