Inflation versus Deflation Tournament Game 3 - Part I: The endless saga continues - Eric Janszen

[raja]

Re: Inflation versus Deflation Tournament Game 3 - Part I: The endless saga continues - Eric Janszen

Although I currently agree with iTulip's position that inflation is the likely outcome, I think it's far from a done deal . . . .

"Advice to readers: take advantage of the early 2009 Great American Fire Sale and go out and buy all the generators, chain saws, washing machines, fine linens, and other durable goods you’re going to need for the next few years because by the end of 2009 most of the inventory may be sold through, many retailers will be shut down, and replenishment of stocks of the survivors will likely be meager..."

And . . .

"We hope readers took advantage of our late 2008 recommendation and bought the good stuff in 2009 at the prices that junk is being sold at today, and good luck finding high quality products at any price."

Yes, but the examples of inflation given are not durables, but toilet paper, ice cream and soap.
I'm not saying that high-ticket durables are not also experiencing inflation, but the examples presented don't justify the advice previously given.

Furthermore . . . just because we are experiencing some inflation now, that doesn't prove anything. What's to say that we won't experience periods of mild inflation punctuated by periods of mild deflation . . . or other combinations?

The outcome and lessons of the first debate are either unknown to newcomers or has been largely been forgotten. Too bad because that experience (in 1998) taught us that in the absence of the 1930s circumstance of fixed exchange rates and a philosophy of allowing debt deflation to run its natural course, central banks can and will create sufficient liquidity to prevent a disinflation from turning into deflation.

Past performance does not guarantee future results.
Many factors exist now that did not exist in 1998:

1. $52 trillion unfunded liabilities
2. persistent almost-10% unemployment
3. sovereign debt crisis
4. some unknown but stratospheric $ number of derivatives
5. Tea Party
6. widespread internet usage (email, blogs, etc.)
7. the beginning pinch of Peak Oil

There are too many variables to predict with any reasonable degree of certainty . . . although it's certainly instructive to try.

All that being said, I appreciate the valuable information from EJs posts . . . but I take the conclusions with less enthusiasm than that with which they are presented . . . . .

[jk]

Re: Inflation versus Deflation Tournament Game 3 - Part I: The endless saga continues - Eric Janszen

1: Does anybody know (I mean really know and can show) if the CPI calculations are so dumb as to calculate things like Toilet Paper and Ice Cream by the "carton" or roll instead of by a fixed measurement such as oz or sq feet x thickness? Perhaps it is! But I know that RDRees (my favorite nemesis on this debate) will call the above anecdotal. For me Safeway Ice Cream has done exactly the same thing as Bryers, and gosh knows that Gas seem higher (except for the previous momentary peak), but I also see Tomato soup getting put in 33% larger cans these days and LOTS of good sales as a previous person has posted.

i doubt - but don't know - that they're that stupid. however, i do know that they adjust the basket of goods for a phenomenon they call "substitution." i.e. if steak gets too expensive, they assume you buy less steak and more chicken. [and, eventually, i suppose, cat food.] anyway, they will assume that if breyer's gets too expensive, you'll switch to a cheaper brand.

[Diarmuid]

Re: Inflation versus Deflation Tournament Game 3 - Part I: The endless saga continues - Eric Janszen

Here our inflation forecast from the end of 2008:[INDENT][LEFT] [COLOR=DarkSlateGray]Advice to readers: take advantage of the early 2009 Great American Fire Sale and go out and buy all the generators, chain saws, washing machines, fine linens, and other durable goods you’re going to need for the next few years because by the end of 2009 most of the inventory may be sold through, many retailers will be shut down, and replenishment of stocks of the survivors will likely be meager...

Thanks EJ

From the canary in the mine, across the pond - here comes the consolidation.

Widespread retail closures feared

By Joe Dermody
Friday, July 30, 2010
WIDESPREAD retail closures now seem inevitable following successive sales declines in April, May and June, according to Retail Excellence Ireland’s (REI) latest quarterly review.





REI analysts described the sales declines of 2.02% in April, 4.94% in May and 5.47% in June as deeply worrying, and accepted that predictions issued earlier this year of a possible early return to sales growth were optimistic and premature.

Nonetheless, REI’s member stores are at least thankful that the rate of sales decline has eased to 5% for the second quarter of 2010 versus last year. Jewellery enjoyed a 0.07% overall growth, but menswear, footwear and the grocery trade were all down.

REI chief executive, David Fitzsimons, said: "Predictions made earlier this year about the imminent return of growth were overly optimistic. Even in grocery, where sales volumes have held up, price reductions and price wars led to a 7% decline in value for the quarter.

"Retailers are telling us it’s not looking good for July either. The back-to-school rush will create opportunities for some, but disadvantages for others. The price of school books etc hasn’t reduced, so that will undermine the consumer’s ability to spend on other items.

"As for business closures, we really haven’t even started yet. The Revenue is talking about retailers having difficulty to pay their VAT and taxes. The liquidation rates have doubled since last year, but that only takes into account the PLCs. Most retailers are sole traders. Footwear and jewellery did okay last quarter, but that is only versus awful comparables for last year."

Jewellery recorded overall growth of 0.07% during the past three months. Footwear’s gains of 3.48% in April and 0.34% in May were wiped out by a sales decline of -12.57% in June.

On a positive note, wage costs as a percentage of sales improved to 15.79%, versus 18.43% in Q2 2009. Rent cost as a percentage of sales began to modify in Q2 at 12.47% as opposed to 13.16% this time last year.

However, David Fitzsimons notes: "The smaller landlords have been willing to negotiate rent reductions, but many big landlords and property management institutions are not helping. Even the deals with the smaller landlords are a year old. They will now want to negotiate those rates back up."

This story appeared in the printed version of the Irish Examiner Friday, July 30, 2010

Read more: http://www.examiner.ie/business/wide...#ixzz0vBi9WrbE

[ASH]

Re: Inflation versus Deflation Tournament Game 3 - Part I: The endless saga continues - Eric Janszen

1: Does anybody know (I mean really know and can show) if the CPI calculations are so dumb as to calculate things like Toilet Paper and Ice Cream by the "carton" or roll instead of by a fixed measurement such as oz or sq feet x thickness?

No, it is not calculated in such a dumb way:

During each call or visit, the economic assistant collects price data on a specific good or service that was precisely defined during an earlier visit. If the selected item is available, the economic assistant records its price. If the selected item is no longer available, or if there have been changes in the quality or quantity (for example, eggs sold in packages of ten when they previously were sold by the dozen) of the good or service since the last time prices were collected, the economic assistant selects a new item or records the quality change in the current item.

The question, I suppose, is the methodology for transforming the change in quality/quantity into a numerical component of the CPI.

See Appendix 3 of this document for evidence that food prices are tracked by content rather than package.

[fishdog]

Re: Inflation versus Deflation Tournament Game 3 - Part I: The endless saga continues - Eric Janszen

I have worked for a massive consumer packaged goods company for the last five years. Since 2007 I have seen rising prices and shrinking packaging, a trend which really took off after $4/gallon fuel seemed to stick around. We raised prices from 3.49-3.79-3.99, full revenue, core items. But, hardly anyone pays those prices because the products are on promo every week, if not every other week. The kicker is: consumers pay $2.99 for a product "on sale" whereas one or two years ago that product, at that price/size, was regular price.

Sales began their slide end of last summer, and hit a floor beginning of this year. Holding steady now, but off 5-8% from prior.

[MarkL]

Re: Inflation versus Deflation Tournament Game 3 - Part I: The endless saga continues - Eric Janszen

No, it is not calculated in such a dumb way:

During each call or visit, the economic assistant collects price data on a specific good or service that was precisely defined during an earlier visit. If the selected item is available, the economic assistant records its price. If the selected item is no longer available, or if there have been changes in the quality or quantity (for example, eggs sold in packages of ten when they previously were sold by the dozen) of the good or service since the last time prices were collected, the economic assistant selects a new item or records the quality change in the current item.

The question, I suppose, is the methodology for transforming the change in quality/quantity into a numerical component of the CPI.

See Appendix 3 of this document for evidence that food prices are tracked by content rather than package.

Yea, the methodology, and how they select the new item, is of course, key.

Excellent Info Ash. Thank you. So I know health care and energy inflation is sucked out of the CPI artificially lowering it but these omissions are known. We should (hopefully) see some indication of EJ's anecdotal TP and Ice Cream examples in the CPI, unless the methodology has been recently revamped to hide things.

[ASH]

Re: Inflation versus Deflation Tournament Game 3 - Part I: The endless saga continues - Eric Janszen

We should (hopefully) see some indication of EJ's anecdotal TP and Ice Cream examples in the CPI, unless the methodology has been recently revamped to hide things.

Their June 2010 report said this:

The food index was unchanged in June for the second straight month. The index for food away from home rose 0.1 percent, the third straight such increase, while the food at home index declined 0.1 percent. Within the latter group, four of the six major grocery store food groups declined. The fruits and vegetables index fell 1.3 percent, mostly due to a 3.0 percent decline in the index for fresh vegetables. The index for cereals and bakery products fell 0.6 percent and the indexes for other food at home and for nonalcoholic beverages fell 0.3 percent and 0.2 percent, respectively. In contrast to these declines, the index for meats, poultry, fish, and eggs rose 1.0 percent in June, the sixth consecutive monthly increase, and the dairy and related products index rose slightly. The food at home index has risen 0.2 percent over the last 12 months with none of the major groups rising or falling more than 2.0 percent.

That report shows an unadjusted 0.7% change for food items from June 2009 to June 2010.

It also claims "personal care products" dropped in price by 1.4% on an unadjusted basis from June 2009 to June 2010.

I would guess that toilet paper falls into the category "Hair, dental, shaving, and miscellaneous personal care products", in which case the seasonally-adjusted change in the six months up to June 2010, expressed as an annualized rate, was -3.8%.

[jk]

Re: Inflation versus Deflation Tournament Game 3 - Part I: The endless saga continues - Eric Janszen

Their June 2010 report said this:

The food index was unchanged in June for the second straight month. The index for food away from home rose 0.1 percent, the third straight such increase, while the food at home index declined 0.1 percent. Within the latter group, four of the six major grocery store food groups declined. The fruits and vegetables index fell 1.3 percent, mostly due to a 3.0 percent decline in the index for fresh vegetables. The index for cereals and bakery products fell 0.6 percent and the indexes for other food at home and for nonalcoholic beverages fell 0.3 percent and 0.2 percent, respectively. In contrast to these declines, the index for meats, poultry, fish, and eggs rose 1.0 percent in June, the sixth consecutive monthly increase, and the dairy and related products index rose slightly. The food at home index has risen 0.2 percent over the last 12 months with none of the major groups rising or falling more than 2.0 percent.

That report shows an unadjusted 0.7% change for food items from June 2009 to June 2010.

It also claims "personal care products" dropped in price by 1.4% on an unadjusted basis from June 2009 to June 2010.

I would guess that toilet paper falls into the category "Hair, dental, shaving, and miscellaneous personal care products", in which case the seasonally-adjusted change in the six months up to June 2010, expressed as an annualized rate, was -3.8%.

is it clear whether these indices are before or after the effects of substitution and hedonic adjustment? looking at the pdf, i would assume the answer is "after."

[Jay]

Re: Inflation versus Deflation Tournament Game 3 - Part I: The endless saga continues - Eric Janszen

is it clear whether these indices are before or after the effects of substitution and hedonic adjustment? looking at the pdf, i would assume the answer is "after."

Does a tent count as a house substitution?

[vinoveri]

Re: Inflation versus Deflation Tournament Game 3 - Part I: The endless saga continues - Eric Janszen

The bad news, while the Fed put a floor on commodity prices and prevented disinflation from developing into deflation, the Fed can’t print purchasing power; unemployment will remain high and demand weak even as producer price inflation returns to its pre-crisis inflation rate. ]

I'm confused by this in that it seems that the Fed in conjunction with the other parts of government and via the banking system have increasingly been able to create purchasing power through debt creation, and they can certainly do it now if they had the will to, e.g., by charging interest on bank reserves at the Fed, incentivizing the banks to lend (with the implicit backstop). Or is it the case that all the credit availability in the world won't stimulate animal spirits in a balance sheet recession ... So my question is: is lending and credit down b/c no one wants to borrow or b/c no banks want to lend (and this cautios lending stance is sanctioned by the Fed)? I would suppose the latter, although it may be some of both, I have a hard time believing that a population addicted to debt will turn their nose up at low interest rate credit.

Do they not want inflation? and why not, it would benefit the debtors, the biggest one being the US treasury, but it would penalize the creditors (banks and investor class) and of course make it much more difficult to role over the existing US debt. But if fear of higher bond yields is the driver keeping lending in check (which would mean there are indeed bond vigilantes and the markets are bigger than govs), I don't see how this fear will ever be resolved; after all the debt isn't getting any smaller. At some point rates must rise and the treasury debt roled over with high servicing costs.

So what is it that the Fed fears and what does the Fed know that we don't (or is it not so much knowledge as a caution)? As we've seen a la Volcker, if inflation gets out of hand, the Fed can bring it under control by raising rates dramatically.
This is what I'm trying to understand: the dynamic and interelationships, economically and politically (i.e., currency and bond yield wise) that prevents the Fed from generating some inflation via compelling the banks to start fractionally lending on all those reserves.

Perhaps then the plan is simply to keep fed funds at 0 indefinitely in an effort to keep the long bond down while at the same time restraining lending enough to keep inflation in check and prevent the long bond from rising. Benefits banks, benefits the treasury, and is ot negative on the stock market (you want 0.5%. yield on 2 year money, 3% on ten year money, or take your chances with the stock market sporting a 2%+ yield but with "growth potential" .... yuk, what a selection of choices .... gold does look pretty good still.

[doom&gloom]

Re: Inflation versus Deflation Tournament Game 3 - Part I: The endless saga continues - Eric Janszen

"inflation in everything you need, deflation in everything you want"


I think you hit the nail on the head with that one.

I don;t know if it was said before I put it up on this board, but I phrase it as "inflation in what you need, deflation in what you own". Used houses, cars, boats etc go down, food, energy, and similar go up.

[Chris Coles]

Re: Inflation versus Deflation Tournament Game 3 - Part I: The endless saga continues - Eric Janszen

Thanks EJ, very nice to see you continuing with such well thought out threads.

My take on this is that there are a lot of smaller operations manufacturing parts for the Brown and White goods sectors that will now start to drop out of business as their strategy of trying to keep going until the upturn has now proven impossible. Instead of stability, all we have is a continuing instability. This next winter is going to be very interesting indeed.

[dummass]

Re: Inflation versus Deflation Tournament Game 3 - Part I: The endless saga continues - Eric Janszen

The Fed is waiting for a trigger; politically, they can't begin QE2 until the stock market crashes. Yet, stock market participants know that QE2 is coming and that stocks will be the greatest beneficiary of the new liquidity, so they stay in stocks.

Someone has to flinch first in this high-stakes game of chicken. I've put my money on Bernanke. Stock market participants have the most to lose, there are too many weak hands. Bernanke won't flinch; he's a rock.

[Jay]

Re: Inflation versus Deflation Tournament Game 3 - Part I: The endless saga continues - Eric Janszen

So what is it that the Fed fears and what does the Fed know that we don't (or is it not so much knowledge as a caution)? As we've seen a la Volcker, if inflation gets out of hand, the Fed can bring it under control by raising rates dramatically.

The Fed can not raise rates. It would destroy what is left of the economy and send unemployment to the moon. You would see pitchforks.

[jtabeb]

Re: Inflation versus Deflation Tournament Game 3 - Part I: The endless saga continues - Eric Janszen

Yes, and with a quality improvement to boot! (So it is cheaper, and of higher quality, hedonically speaking, of course)