Ritholtz on Inflation

Discussion in 'Economics' started by wabrew, Oct 30, 2007.

  1. wabrew


    Classic Barry - a must read

    Added Surcharges
    Tuesday, October 30, 2007 | 07:22 AM
    in Commodities | Data Analysis | Energy | Federal Reserve | Inflation
    If you want to know about abstract economic theory, speak to an economist.

    However, if you have questions about inflation, I suggest that rather than engaging members of the Dismal Science in a Q&A, try speaking to any small business owner instead. You will quickly learn the difference between theoretical core price increases, and the real world.

    A perfect example of this was an article in the Sunday NY Times. It suggested that inflation, tho' relatively modest for the past few years, is now starting to become an increasing worry: Maybe Inflation Is More Than a Sideshow.

    The line that made my head nearly explode was this one: "Inflation has been rather benign throughout this decade."

    How does one begin to even answer such sheer, imbecilic nonsense as that? I will suppress the instinct to engage in name calling about the author's ancestors, and once again c a l m l y review the available data.

    We know that energy prices have skyrocketed: From 2001, when Oil was $18 a barrel, to a recent price of $92, Oil has risen 411%, for an annualized inflation rate of 31.24%. Foodstuffs are also up a similar amount: Beef, dairy, wheat, corn, rice, soy beans all recently hit record highs.

    But as we know, the Fed and the BLS do not like counting the very products we each need to eat, travel to work -- to survive every day -- as part of the inflation basket. If they did, it would force them to admit that inflation is actually quite robust.

    And even though these so-called core items are counted separately, they are pressuring their way into other goods and services. For example, FedEx just announced they are raising rate by 4.9%. And a recent WSJ article noted that Business-Travel costs on the rise. Expect to see many of these "non-core" cost increases passed through to consumers and businesses in the coming year.

    My favorite example of this comes from our friend Gary who owns a successful restaurant (Bin 23 in Locust Valley). I occasionally ask him about price increases, and beyond the usual -- food, electricity, taxes, and insurance -- the thing that I find fascinating are his energy surcharges. Last week, he told us that every single delivery he gets has an "energy surcharge" on it -- usually $5 or $10.

    Now, as a Restaurant that relies on fresh food being delivered 6 days a week, that can add up. But this surcharge is even on linens, flowers, silverware, glasses -- essentially everything he uses to run his business. It works out to a few $1000 per month.

    I haven't been able to figure out how the BLS tracks these surcharges, if at all. That suggests to me that another source of price increases isn't being counted by our friendly governmental statisticians.


    Ironically, its more than just food and energy causing price increases: We know Housing has just about doubled over the past decade (prices are now down about 10-15% over the past 18 months. Medical services and health insurance have been running double digit annual gains for the past decade. Tuition costs are increasing for even longer than that, along with books and other sundries.

    This is before we even get to the Dollar. Last week, Venezuela's Energy Minister Rafael Ramirez said that OPEC is likely to discuss creating a basket of currencies for oil pricing at its next summit due to the steady decline in the greenback. That will reduce energy inflation to sme degree -- but could be a potential disaster for the USA, which has benefited from having the World's reserve currency.


    The FOMC begins their two day deliberations about rates, and I suspect they are terrified about the slowing economy and the credit crunch. The result will be at least one more, and possibly two rate cuts, as they attempt to inflate their way out of any slowdown.

    I understand some people are afraid of deflation, but we have yet to see any early warning signs of that. Expect prices to continue to rise over the coming years . . .