"Economists are pessimists: they've predicted 8 of the last 3 depressions."
--Barry Asmus

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Friday, July 15, 2011


Who wants some inflation?
Realistically, nobody.  But everybody talks about it, and everybody worries about it, and everybody is waiting for the floodgates to open for the massive quantities of liquid cash injected by the Federal Reserve to begin driving inflation up and up.  The Street worries about inflation because, if it begins to go up, the Fed will have to start tightening and that would mean the end of the (comparatively) easy credit environment.  Also, inflation grinds away at the domestic purchasing power of the dollar, causing consumer spending and to dry up and corporate spending to slow down, both of which cripple GDP.
So nobody wants inflation, and everybody watches the CPI-U.  And last month, we watched the May numbers with dread in our hearts as we completely missed expectations.  CPI-U (also known as "headline inflation") was up 0.2%, with the core CPI-U (the inflation the Federal Reserve watches) up 0.3%.  For the rolling year, CPI-U was up 3.6%, core CPI-U was up 1.5%, food CPI was up 3.5%, and energy CPI was up 21.5%.
Undaunted, the Econoday-surveyed analysts predict great things for the month of June.  They're calling for a 0.2% decline in headline inflation, and "only" a 0.2% increase in core inflation.  Are they right.  Let's check the Consumer Price Index Summary from the Bureau of Labor Statistics, and find out.
And it turns out that they were half right.  CPI-U declined 0.2% in June, but the core CPI-U increased 0.4%.  It's reasonable to assume that the overall decline in headline inflation derives from food and/or energy, and it turns out that this is an accurate assumption.  Food CPI increased 0.2%, but energy CPI declined 4.4%.  This puts the annual CPI-U at 3.6%, core CPI-U at 1.6%, food CPI at 3.7% and energy CPI at 20.1%.
To put this in perspective, here's an interesting accounting trick.  If you divide 72 by an annual rate of increase, you find out how many years it takes to double something.  If you're looking at an investment, it's roughly how many years it takes your investment to double.  If you're looking at inflation, its how many years it takes costs to double.  So, based on the rule of 72, the fixed basket of goods and services measured by CPI-U should double in cost every 20 years.  Food costs should double every 19-20 years, and energy costs should double every 3.5 years (with gasoline doubling every 2 years).

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