October 4, 2007
ANOTHER LOOK AT INFLATION
Inflation is a familiar subject on these digital pages. As a risk factor, however, it's been mostly a non issue, or so the government's official inflation numbers advise. We worry about inflation just the same. One reason arises from the possibility that commodities are in a secular bull market, energy in particular. We've discussed why that may spell higher inflation down the road. In the October issue of Wealth Manager, we looked into the topic in a bit more detail. Inflation may ultimately prove to be tame after all. But let's not be hasty. Before you make a final decision, consider one of the risks that could derail the sunny outlook. To probe the darker side, read on...
Posted by jp at October 4, 2007 9:25 AM
I for one and getting a little bit tired of the disconnect between academic discussions of core and non core inflation.
I live in the world where gasoline, diesel, and propane have increased by massive amounts in the last five years.
Food which cost $28.00 three years ago now is around $51.00 and I can not be more precise because it is "volatile" and not in a good way. Last week I am sure that same basket was around $60.00. This is all done to the tune of a chorus of "we are lucky there is no inflation now".
On a more subtle level my auto insurance has doubled between 2002 and today. And no I haven’t changed cars, gotten in any accident or had any driving infractions, I had it explained to me by an agent that insurance is a business based on investments and that when the stock market collapsed in 02 the companies had to make up the difference with higher rates. Some of the increase are overt like the sudden 25+ percent increase in 03 and some subtle like the removal of the second car discount. What ever the reason the rates went up and when the market came back they did not go down.
There was a "bubble in housing" so let’s say, you don’t buy a house in 02 and it is costs 150% more today than it did then. Now prices are assumed to be dropping. . . some, which has all the financial companies and loan officers running for cover but prices are not dropping 67% to where they used to be. Is the difference going to show up in the inflation statistics? Or are they already baked in to the one point something number that the official government number says represents inflation reality.
Don’t even get me started on medical costs. I know that my last dental appointment set me back a cool $140.00 for 15 minutes of cleaning and x- rays. Anybody want to guess how much I paid two years ago or maybe four? If you guessed $122.00 and $105.00, you win! Now, since you are so smart, maybe you can tell me how to fit that in the one point something official government inflation number.
So lets say for the sake of argument that you wanted to buy some copper wire to wire your house with. Do you have any idea how much that has changed in the last five years? If you guessed anything south of 350% go to the back of the class because that buck a pound copper you could buy in 2001 is now about $3.65/pound and climbing like an F-16 on full afterburners. Heck, the #2 scrap is fetching better than three buck which is why thieves are pulling up outside of businesses and boosting the air conditioning units. They grab a grand worth of scrap copper and do 20 grand in damage in the process. So is this what a "cyclical bull market in commodities with low inflation" looks like? By the way all metals have similar statistics and stories.
Look, I know the inflation numbers are baked. Everything we need is going ballistic and is being averaged out with everything we want (The Chinese made big screen TV ect.). I can even assume a few reasons and motivations for doing so if I want to delve into the dark worlds of speculation or politics. But if we can keep this objective and civil for a while longer how about the statistics that pencil out to the fact that two to three year US treasury bonds are yielding about the same as similar length BBB corporate bonds (Minyanville: Third quarter in review: You Have Got To Be Kidding Me). Isn’t the term used for BBB bonds "junk status". My question is; are the markets making a statement about the credibility of the US’s full faith and credit or the relative safety of junk bonds?
Posted by: Robert R at October 4, 2007 1:04 PM