Editore"s Note
Tilting at Windmills

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February 20, 2008
By: Kevin Drum

INFLATION = 4.3%....The headline inflation rate for 2007 is now official:

The Consumer Price Index rose 0.4 percent in January, a bigger gain than economists had predicted. Over the last 12 months, the index has surged by 4.3 percent, one of the highest year-over-year rates in decades, the Labor Department said.

....The core rate is 2.5 percent above its level in January 2007, above the Fed's recognized comfort zone ceiling of 2 percent.

Italics mine. I don't have any special point to make about this except to call attention to the numbers themselves. A lot of people — including a lot of reporters — are still vaguely under the impression that inflation is running at the same low rate it's been running at for the past decade. It's not. The CPI was up 4.3% last year, which means that any growth rate less than that is negative in real terms. That applies to interest rates, retail sales figures, government outlays, wage increases, etc. etc.

I'm just pointing this out as a public service. As always, "Economists predict that inflation will taper off by the second half of this year." And maybe it will. But for now it is what it is.

Kevin Drum 10:59 AM Permalink | Trackbacks | Comments (41)

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Comments

There goes another prime rate cut down the drain.

Shucks.

Posted by: pj in jesusland on February 20, 2008 at 11:06 AM | PERMALINK

But we can keep borrowing trillions from China, giving tax cuts to millionaires, and all will be well, right? Right?

Posted by: Gore/Edwards 08 on February 20, 2008 at 11:08 AM | PERMALINK

And it's only going to get worse. It's pretty obvious the Fed is trying to inflate their way out of this credit crunch.

Posted by: Justin on February 20, 2008 at 11:16 AM | PERMALINK

Rising prices, slowing economy ... are we rerunning the "Stagflation" episode from "That '70s Show"?

Posted by: csp on February 20, 2008 at 11:17 AM | PERMALINK

I think that hastily blaming the Federal Reserve is inaccurate. A large part of the inflation is due to the steady high demand for commodities (largely due to China's continuing growth); another large part is due to the demented corn ethanol subsidy, which has led to spikes in food prices. The Fed can control neither of these.

Posted by: sammler on February 20, 2008 at 11:19 AM | PERMALINK

PJ, wrong. Justin, right.

Five bucks says Big Ben rams through one more rate cut, at least, and voila! another bubble created.

CSP, you bet your boots we are.

Posted by: SocraticGadfly on February 20, 2008 at 11:21 AM | PERMALINK

Clearly most of this is due to the weakening dollar and its effect on the price of imports. Nonetheless, we can expect republicans and business interests to react as if this is wage inflation, and put yet more downward pressure on wages. In actual fact, it is Bush's economic and tax policies that have sent the dollar into a downward spiral. Heckuva job, Bushie!

Posted by: Dave Brown on February 20, 2008 at 11:23 AM | PERMALINK

The good news is that a recession usually brings down the inflation rate.

Posted by: Jose Padilla on February 20, 2008 at 11:26 AM | PERMALINK

Gadfly, do the rising prices indicate inflation or deflation? Is there too much money floating around the system, or not enough? The early symptoms are the same for both.

Posted by: corpus juris on February 20, 2008 at 11:27 AM | PERMALINK

Kevin, I'm not sure why you consider this a big deal. Isn't inflation usually a sign of a bullish economy and hence strong economic growth? We certainly wouldn't want be like Botswana which has no inflation because there's no economic growth.

Posted by: Al on February 20, 2008 at 11:28 AM | PERMALINK

In what part of Michigan is Botswana?

Posted by: Brojo on February 20, 2008 at 11:30 AM | PERMALINK

The only news here is that part of the Bush Administration has finally admitted that inflation has risen. It's been part of the standard talking points for administration officials to mention strong economic foundation, low inflation, and steady jobs growth.

As if any of those actually existed over the past year or so.

Posted by: Lifelong Dem on February 20, 2008 at 11:32 AM | PERMALINK

Hey, I'm no economist, but I have this crazy notion that it's no coincidence that inflation returns after several consecutive years of budget deficits.

Call me superstitious.

Posted by: Quaker in a Basement on February 20, 2008 at 11:41 AM | PERMALINK

$4 gas is predicted for this summer. That should add to inflation.

Posted by: bakho on February 20, 2008 at 11:41 AM | PERMALINK

Most of the cost of food comes from some place
other than the price of corn. The doubling of the
price of a bushel of corn added only about a
nickel to the cost of a box of cornflakes.

The price of a pound of corn received by the farmer
two years ago was about 5 cents. Now it is about
11 cents. That pound box of cornflakes should have
gone up only 6 cents over the past year

By the way, A bushel of corn in 1968 was $1.25,
adjusted for inflation that comes to $7.68 today.
Corn today brings about $5.00 per bushel. Even
with this "spike" in commodity prices corn has
not kept up with inflation.

Posted by: Tommy B on February 20, 2008 at 11:47 AM | PERMALINK

Isn't the understanding that very rapid rises in energy prices, and associated rises in prices of products and services with high energy content, are what are mostly driving this inflation? If so, then if energy prices stabilize, general inflation will subside?
I can't see general businesses raising prices in this economy unless they have absolutely no choice.

If it's energy prices that are driving this inflation, efficiency is one big long-term remedy. Reducing the energy content of goods and services, and reducing energy usage in general, would make the US economy less sensitive to the (greed-driven) whims of OPEC, other energy producers, and speculators.

Posted by: Bill Arnold on February 20, 2008 at 11:48 AM | PERMALINK

Maybe some economist type can explain to me why the inflation figure I hear on the radio news is often qualified as "not including food or fuel?" Is it because those are two things we don't really need?

Posted by: thersites on February 20, 2008 at 11:48 AM | PERMALINK

Is it because those are two things we don't really need?

It's because they're prone to wide swings over a short period of time, and thus tend to disguise the 'real' overall trend.

Or something.

Posted by: Davis X. Machina on February 20, 2008 at 11:52 AM | PERMALINK

That's why we need the Republican John McCain for President. He is good at fighting wars, and a fight against inflation will be a cinch for him. Remember how easy it was for another republican to fight inflation just with WIN buttons?

Posted by: gregor on February 20, 2008 at 11:55 AM | PERMALINK

thersites, @ 11:48 a.m. I've wondered the same thing. Maybe we don't need to eat or drive our cars??

Posted by: pol on February 20, 2008 at 11:57 AM | PERMALINK

McCain...good at fighting wars...fight against inflation
Cool. But help me with this. When we were attacked by Saudi citizens based in Afghanistan, we invaded Iraq. Who do we invade to fight inflation?
(Extra points if you can work in Bill Clinton and "fellatio" which has the same root as "inflation." Or is that fallacious reasoning?)

Posted by: thersites on February 20, 2008 at 12:20 PM | PERMALINK

Please, look at what's happened to exchange rates before stating the sky is falling with additional inflation. The value of the dollar is down about 10%.

http://research.stlouisfed.org/fred2/series/TWEXBMTH?cid=105

Oversimplifying just a bit, since over 15% of GDP is imports, that would translate into about a 1.5% increase in the GDP deflator. The CPI number won't be exactly equivalent, but these back of the envelope calculations suggest that much of the increase in the rate of inflation is simply due to a decrease in the value of the dollar. That's a very different problem than having inflation due to, say, excess demand or excessive money growth.

Posted by: Rich E on February 20, 2008 at 12:22 PM | PERMALINK

Maybe we don't need to eat or drive our cars??

Now there's a choice. Eat our cars or drive them.

Posted by: Lifelong Dem on February 20, 2008 at 12:23 PM | PERMALINK
Maybe some economist type can explain to me why the inflation figure I hear on the radio news is often qualified as "not including food or fuel?"

The theory of this is that food and fuel have high short-term volatility and thus they can mask the real long-term trend. Now, its true that food and fuel have high short-term volatility. OTOH, the long-term trend in food and fuel is not neutral, so excluding them distorts the real trend as much as including them. If you want to know what is really happening in the short term, you need the whole inflation number including food and fuel. If you want to know what is happening in the long term, you do too, but you may not want to take point in time figures at the end points, but (say) annual averages to iron out short-term volatility.

Simply excluding components makes little sense unless the price of those components is both volatile and has its variation centered around a constant price (using the price index computed from all other goods.) The first is true of food and fuel, the second is not.

Posted by: cmdicely on February 20, 2008 at 12:56 PM | PERMALINK

We certainly wouldn't want be like Botswana

No, we'd much rather be like Zimbabwe.

Posted by: Jenna's Bush on February 20, 2008 at 1:07 PM | PERMALINK

I'm pessimistic on inflation. The Federa; Reserve's dramatic interest rate cuts may be good for preventing a recession, but they invite inflation. I am not an economist, but I think inflation will continue to rise throughout the year.

Posted by: ex-liberal on February 20, 2008 at 1:33 PM | PERMALINK

The theory of this is that food and fuel have high short-term volatility and thus they can mask the real long-term trend.

Yes.

And that's a stupid theory.

Fuel, (especially!) is the INPUT to all economic activity. Energy drives everything. Period. The cost of energy is the true currency of our modern economy. (which is why the Gold Standard made no sense). Unfortunately, in a period of declining oil production (whether there's any down there or not, makes no difference - companies are not investing in expanding capacity, despite decades of grotesque record profits) - this "currency" is going to contract. Wealth is going to contract (causing our dollars to inflate by comparison).

If we can transition to renewables (solar, wind, tidal, whatever, etc), we can return to a sane, sustainable economic pattern, based a system that outputs at a rate equivalent to its input.

But we won't. Because we're greedy animals. And well into the next decade, we'll be killing eachother over the right to pump and burn every last drop of oil in the ground, regardless of the long-term consequences.

Posted by: osama_been_forgotten on February 20, 2008 at 1:40 PM | PERMALINK

Inflation could just be the tip of the problem:

America’s economy risks mother of all meltdowns By Martin Wolf

... Recently, Professor Roubini’s scenarios have been dire enough to make the flesh creep. But his thinking deserves to be taken seriously. He first predicted a US recession in July 2006*. At that time, his view was extremely controversial. It is so no longer. Now he states that there is “a rising probability of a ‘catastrophic’ financial and economic outcome”**. The characteristics of this scenario are, he argues: “A vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe.”
Here are his 12 – yes, 12 – steps to financial disaster....

Unfortunately, due to the lack of timely action by Greenspan and Bernanke, this scenario doesn't sound improbable.

Posted by: Mike on February 20, 2008 at 1:45 PM | PERMALINK

Like those numbers are "real".

One thing to remember is that Bush Handlers, Inc. have been "playing" w/the numbers since they moved in. Anything to keep from operating in reality.

Cue trolls claiming "Clinton did it too"

And no, they aren`t the only ones to do such. ReThuglicans just rely on it (institutional lying) as their one major activity. Everything else they do just follows from that.

"Our ignorance is not so vast as our failure to use what we know." - M. King Hubbert

Posted by: daCascadian on February 20, 2008 at 1:51 PM | PERMALINK

Over the last 12 months, the index has surged by 4.3 percent

I assume they mean percentage points? Or is the index set (and reset) at 100?

Posted by: gfw on February 20, 2008 at 1:53 PM | PERMALINK

I'm greatly annoyed with Professor Roubini. Can't access his blog any more without ponying up a subscription.

'It is clear that the developing pains of the credit crisis of 2007 are not evenly borne by all, with a select few who had caused the crisis walking away with millions in severance compensation, and the few who are selected to restructure the financial mess no doubt will gain millions, while the mass of victims are losing homes, jobs and pensions, with no end in sight. The trouble with unregulated finance capitalism is not just that it inevitably produces boom and busts, but that the gains and pains are distributed in obscene uneven proportions.' - Henry C. K. Liu THE ROAD TO HYPERINFLATION, Part 2 A failure of central banking http://www.atimes.com/atimes/Global_Economy/JA30Dj03.html
Posted by: MsNThrope on February 20, 2008 at 1:54 PM | PERMALINK

osama_been_forgotten >"...The cost of energy is the true currency of our modern economy...."

Not so.

The "true currency" is a mixture of things, energy being one. Another is "information". Eugene & Howard have created the tools to construct a real true currency that is immune to all these political manipulations.

Too bad "We the people..." are not smart enough to use them.

“Revolutions, before they happen, appear to be impossible and after they occur they appeared to have been inevitable.” - Alexis de Tocqueville

Posted by: daCascadian on February 20, 2008 at 2:02 PM | PERMALINK

NEVER say "it is what it is."

Posted by: john on February 20, 2008 at 2:07 PM | PERMALINK

Al: We certainly wouldn't want be like Botswana which has no inflation because there's no economic growth.

Hmmm, from the CIA World Fact Book:

Botswana has maintained one of the world's highest economic growth rates since independence in 1966, though growth slowed to 4.7% annually in 2006-07.

Down to 4.7%, how terrible! (although Michiganers would be envious).

Ok, Botswana is far from Utopia. They have one of the highest HIV infection rates. It is, however, one of the economically best run countries in Africa, and according to folks I know who've been there, a very nice place to visit.

Brojo: In what part of Michigan is Botswana?

The little known sub-equatorial peninsula.

Posted by: alex on February 20, 2008 at 2:22 PM | PERMALINK

According to monetarists, "inflation is, always and everywhere, a monetary phenomenon. IOW, too much money chasing too few goods.

It's not cost push, i.e. the cost of oil goes up, pushing up other costs, etc. And it's not demand led, that is, economic growth in China causes demand for oil to increase, thus pushing up the price.

It's all about money - too much and you have inflation.

Posted by: gab on February 20, 2008 at 2:32 PM | PERMALINK

Yeah, Alex, I did a double take when Al said we "wouldn't want be like Botswana" (which as you note, does fine in economic growth terms). This "Al" must be the parody version again.

Posted by: Matt Stevens on February 20, 2008 at 3:19 PM | PERMALINK

daCascadian,

The "true currency" is a mixture of things, energy being one. Another is "information". Eugene & Howard have created the tools to construct a real true currency that is immune to all these political manipulations.

At least twice now you've made this statement but when I follow the links I get information about ecology.

Can you provide a link directly to the "currency" you are talking about?

Posted by: Tripp on February 20, 2008 at 4:45 PM | PERMALINK

The CPI was up 4.3% last year, which means that any growth rate less than that is negative in real terms. That applies to interest rates, retail sales figures, government outlays, wage increases, etc. etc.

Well...

Core inflation is probably the better measure for monetary policy and interest rates. Maybe even for retail sales, if the outlet in question doesn't sell gasoline.

For wage increases though, headline inflation seems appropriate - when the general price level rises by 4%, the worker is less off even after a 3% raise.

Here's a nice post on the proper uses of different inflation measures:
http://knzn.blogspot.com/2007/10/what-is-core-for.html

Posted by: Measure for Measure on February 20, 2008 at 5:26 PM | PERMALINK
Core inflation is probably the better measure for monetary policy and interest rates.

Probably not, though that was, at least in theory, motivation behind developing the core inflation measure; the logic that says it is the better measure for that purpose only works, again, if the excluded factors are volatile but have a strong tendency to have no net contribution to long-run inflation; if they have tend to contribute to inflation, you probably want to include them but use a several-period average to iron-out the distortions due to short-term volatility.

Maybe even for retail sales, if the outlet in question doesn't sell gasoline.

For what about "retail sales"? For year over year same-store or industry-wide comparisons? Maybe. But then its not even clear that any of the CPIs are the right measure to start with (whether core or not). Consider bookstores, for a minute. If the PPI for book publishing increases by 15%, but the CPI (core or not) is only up 5%, and book retailers gross sales are up 10% in nominal dollars (4.76% "real" increase based on CPI) is that really a sign of healthy growth in the bookselling industry?

Posted by: cmdicely on February 20, 2008 at 6:14 PM | PERMALINK

"Economists predict that inflation will taper off by the second half of this year."

I hadn't realized that economists were into using Friedman Units, too.

Posted by: The Oracle on February 20, 2008 at 11:07 PM | PERMALINK

Probably not, though that was, at least in theory, motivation behind developing the core inflation measure; the logic that says it is the better measure for that purpose only works, again, if the excluded factors are volatile but have a strong tendency to have no net contribution to long-run inflation; if they have tend to contribute to inflation, you probably want to include them but use a several-period average to iron-out the distortions due to short-term volatility.

Well food and energy are volatile. But they are also largely set by international supply and demand. Changes in monetary tightness would only affect them via exchange rates, and changing exchange rates would affect core inflation as well (albeit with a longer lag).

Over the medium run though, perhaps headline inflation could be targeted. But sending core down to zero percent in order to bring headline inflation to 2% seems like a recipe for liquidity traps. Under such circumstances, real interest rates in the nonvolatile sector would remain positive, even if the Fed cut interest rates to 1/4 %.

Retail:
PPI - Producer Price Index

Good point. I'd *like* to say that core inflation is likelier to be a better proxy for most retail industry-level PPIs, but I would really have to look at the data. At any rate in your example, it seems that sales volume is shrinking.

Hm. Many retailers are cross-industry though. Say Walgreen's has 3% revenue growth - more than core but less than headline inflation. I would guess that it's probably enjoying greater sales volume.

Posted by: Measure for Measure on February 21, 2008 at 2:30 AM | PERMALINK
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