The CPI increased at a 5.1% annual rate in the second quarter and is up 4.3% in the past 12 months, matching the biggest gain since last October. The core CPI increased at a 3.6% annual rate in the second quarter and is up 2.6% in the past year,http://www.marketwatch.com/news/story/Story.aspx?guid=%7B0CC3A975%2DEA5A%2D4EDD%2D8180%2D1CA4F966184D%7D&siteid= In May, the PPI had risen 0.2%, with core prices up 0.3%.In the second quarter, the PPI increased at 6.7% annual rate. The core PPI increased at a 1.9% annual rate.In the past year, the PPI is up 4.9%, the fastest year-over-year gain since January. The core PPI is up 1.9% in the past year, the biggest gain since September.Prices for core intermediate goods -- a key gauge of pipeline inflationary pressures -- have risen 7.3% in the past year, the most in 15 monthshttp://www.marketwatch.com/News/Story/Story.aspx?dist=newsfinder&siteid=mktw&guid=%7B07C2A5DB%2DA92E%2D4265%2DA5A1%2D79E8446CF769%7D&link=&keyword=PPIMany may disagree but I don't see 4.3% and 2.6% CPI as horrible, they are well within historic ranges of moderate inflationary cycles. The same is true for PPI's 4.9% and 1.9%(I do bias my view by preffering trailing 12months over annualizing last quarter). Please keep in mind that inflation tends to trail growth and is a natural associate of growth. Its typical to see rising inflation near the middle of or near the end of a growth cycle. We can also expect inflation concerns to bleed into the begining of the slow down portion of the cycle because inflation typically trails growth. What is interesting and needs to be planned for, mitigated against, is the PPI's intermediate goods 7.3%. So far these cost have not been passed on fully to the end consumer. This leaves us in an equity quandry more than anything else. Companies must either pass the cost on, which may reduce the number of units sold thus reducing over all profitability or continue to absorb the cost, cutting into profitability. On the bond side this can put pressure on cash flow which is used to service debt. For weak companies competing in industries that have stronger players this may be very troubling because the stronger players may not pass the cost onto the end consumer thus setting the price, a price harmful to the weaker companies. My grump is that Fed watch talking heads have made enough noise that it may very well push the Fed into another rate hike in Aug. Their short term, goldfish memory, approach is more likely to be detramental then useful. The whole language of "higher then expected" is directed at annualized quarterly and monthly rates which for the most part are IMHO useless to the buy and hold bond purchaser. I'm not convinced its relevant to the big players but some hedge fund or bond house will start the ball rolling and the rest of the lemmings will get in behind them. We have at least 6 rate hikes that have yet to have their full effect on the monetary system. Opposed to this is the chatter and hype that often sets market expectations. There is a real danger within the monetary policy sphere if the Fed completly ignores market expectations nor can they let the tail wag the dog. Which is true? is the burning question and we have no clarity but the talking heads have already begun to make up their minds and have begun to shape Fed expectations. It makes me wonder why I don't own stock in one of the big brokerage houses. They don't even need to work hard to generate churn, there is a whole segment of the media that does it for them. Once again we are at the cusp of the Fed going too far. If history tells us anything we can expect them to take that one more step that over-corrects. The sad thing is that they don't have to move in Aug because they could easily sit back for a whole quarter and not significantly alter the long term. My crystal ball is telling me at least two more rate hikes are forthcoming both driven more by short term hype then by rational analysis. My experiance, my skill set, my world view and my gut all tell me both of these moves are unnceccisary given the current situation.All feedback is welcomejack
Here's Bernanke's spin:http://www.nytimes.com/2006/07/19/business/19cnd-fed.html?hp&ex=1153368000&en=5844b969c814f4cd&ei=5094&partner=homepageHe basically thinks the rise in interest rates should cool inflation back to acceptable range.My spin: long term rates have not gone up anywhere near what Fed rates have. Short term rates are important for credit cards and ARMs, but long term rates are still fairly easy.I don't believe the Fed can do that much to control inflation. I think core inflation may be controllable, but core inflation needs to be redefined to take into account the affect of fuel prices in a new world for energy. Energy will still be volatile, but trending upward in cost at rate greater than the official definition of core inflation, which will affect CPI-U. In other words, we will see CPI-U (and real inflation as experienced by most people) greater than core inflation, not fluctuating around core inflation, as it is supposed to.Producers will pass on higher costs: remember transportation costs are more important than ever for hard goods, because of outsourcing. However, I doubt labor will be able to demand increases that keep up with inflation. To some extent this will keep demand down and prevent prices from going up as much as they would otherwise. However, I think we will see the cost of necessities going up at a rate higher than CPI-U, while discretionaries will have much less demand. The CPI-U, therefore, will misrepresent real inflation as experienced by people more than usual. Unfortunately, neither TIPS nor CDs/Treasuries will account for real inflation.
Unfortunately, neither TIPS nor CDs/Treasuries will account for real inflation.Loki, One of my "ah ha" moments last night was that Treasuries DO account for real inflation, on average and over the long haul.Caveat: “real inflation” in this context is the CPI, not the “PEIR”, which I have defined in past discussions as the “Personally Experienced Inflation Rate”. PEIR is going to vary all over the map according to one's own circumstances. Some people's PEIR will be higher than the CPI. Some people's will be lower. But, on average, CPI is a good-enough benchmark and, most definitely, is a meaningful and useful economic tool. It is also a useful tool for retirement planning as a first estimate. Obviously, the number that matters in the real lives of real people is PEIR, not CPI. We're on the same page there, which is why I avoid TIPS. I know my PEIR is higher than the CPI. I know the government has rewritten the terms of TIPS once (to lower yields and, thus, the government's liabilities and costs) and will do so again and again, as they see fit.But I'm coming to think that Treasuries are a stronger and more useful vehicle than I was giving them credit for, because their rates are determined by the free market. Yeah, the Fed can tinker with the Fed Funds rate and the Discount Rate and play tricks like not reporting M3, but, ultimately, they have to come into the market if they want to borrow money, and, ultimately, it's the market that sets rates. Yes, there is the problem of who owns whom. As the saying goes, “If you owe the bank $1 million, they own you. If you owe the bank $100 million, you own the bank.” Were a true “crisis of confidence” to occur, I don't who'd be the gun-slinger left standing when the shootout ended. My suspicion is that it would be the market that gives in to the Fed, because that is what's already happening. Why else aren't foreign lenders putting their foot down and telling the US to stop running deficits? They ARE saying that, and, to some extent, they're backing from their purchase of dollars (as a percentage of purchases). But no one yet is telling the band to stop playing, and the game of musical, financial chairs goes on, albeit with increasing worry. That's the larger context. Now let's look at your claim that Treasuries won't provide real returns. The vicious period of negative, real-rates of return we just suffered through (due to fact of the Fed's aggressive, post 9/11 cutting) is an aberration, not the “normal” pattern. The normal pattern is that the short-end of the yield curve responds rapidly and proportionally to inflation, either expected or experienced. Why else did interest rates surge so high in the late '70's? Inflation was high, right? Who got hurt? Stock holders. Who benefited? Cash holders. As inflation increased, so did the returns on their cash. In a weird way, the best inflation-protected vehicle is cash and bills. Note holders, and especially, bond holders (to say nothing of stock holders) are going to get squeezed or hurt in such conditions. But Savers can adjust rapidly and appropriately to changing conditions. An exercise I did a couple of posts back was to review the historical data for inflation and compare it with T-Bill yields. To my surprise, I discovered that, on average and over the long haul, the 13-week T-bill provides a real rate of return. The 13-week bill is the customary benchmark for risk-free return. It is also a reasonable benchmark for real return, not in every portion of every interest rate cycle, but on average and over the long haul.What Savers can't do, on average and over the long haul, is overcome the erosive effect of BOTH inflation AND taxes. At best, Savers can mitigate their effects, or, as I like to say, they can "conserve" purchasing power the same way that one can conserve energy, or the same way that a long-distance runner can pace himself to ensure he won't burn out/blow up before he gets to the finish line. And by "Savers" I mean this: people who make use of instruments without risk to nominal principal, e.g., CD's, Treasuries, insured munis, etc. If a person wants to PRESERVE purchasing power, then he has to edge his way into investing, instead of saving. Obviously, no one needs to become an investor. One's financial planning can be structured that sufficient assets are accumulated during one's asset-building years so that draw downs during one's retirement years never deplete resources. That's just a numbers game. LIFE EXPECTANCY minus PRESENTAGE times a dynamic estimate of EXPENSES times a dynamic estimate of INFLATION calculates the needed accumulation and the prudent draw-downs. If assets can be amassed through saving, then, rationally, there is no need to take on the risks and work of investing. What retirement planning always assumes is a steady-state model of the financial universe in the sense that everyone wants to discount the huge spikes in inflation that can be observed in the near-term past. “Oh, we'll never again see 13% inflation”, they say. But they prudently throw the fact a bone by averaging the fact into their reviews of historical data and than use that average to make a projection. But they use that average as a measure of the limits of worst-case scenarios instead of the spike itself being a guideline to the fact that past high's can easily be exceeded by new high's. The underlying math is straight-forward, as well as the fool-heartiness of such benign assumptions, and Mandelbrot in his book, “The Misbehavior of Markets”, rips such ideas to shreds. And even traders have this saying: ”Your worst loss is yet to come.” In such a worst-case scenario where inflation did exceed past highs, who would be hurt and who would be able to surf the tsunami? Cash holders, via short-term debt instruments, would fare quite nicely and ride rates higher, as would traders. (Up or down markets don't make no difference to traders. Price changes is all that matters.) But everyone else would get hurt. Thus, most people rightly fear inflation, but most people wrongly defend against it, which is NOT to say that cash is the solution. But it can be a part of the solution and can be useful. To claim, as you did, that Unfortunately, neither TIPS nor CDs/Treasuries will account for real inflation. is to obfuscate the problem rather than to attempt to solve it. Yeah, terms will need to be pinned down and contexts delimited. But doing breathless reportings of the economic numbers as they are released, e.g., the PPI (which you confused with the CPI) is to do yourself and the forum a disservice. There are some genuinely serious problems here, and you do an admirable job of coping with them. But it might be time to stand back and take a broader view, and it might be time to question conventional wisdoms.“Is cash a good thing or bad thing?”Wrong question, right? When is it useful? When is it not useful? When do CD's/Treasuries provide real rates of return? When not? What is a “real rate of return”? YIELD minus CPI? YIELD minus PIER? YIELD minus inflation (however defined) AND taxes? You're been dealing with such questions for years, as have I, as has anyone who hangs out here. Certainly, betweenst us and amongst us, we can do better than we are toward coming to some useful understandings.Charlie
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