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

[doom&gloom]

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

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.

the Fed may not, but someday the world may choose to do it for them.

[Slimprofits]

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

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.

of course, that is one of the secrets of retail.

My favorite though is advertising a sale that includes a comparison to the old, higher price, even though that price never actually existed.

[we_are_toast]

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

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.

Not much to fear from the public.

[flow5]

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

2010	jan		0.54	0.22	top
	feb		0.50	0.09
	mar		0.56	0.07
	apr		0.55	0.13	top
	may		0.48	0.09	bottom
	jun		0.47	0.04
	jul		0.50	0.08
	aug		0.51	0.09	Top
	sep		0.53	0.05
	oct		0.39	0.04
	nov		0.32	0.00
	dec		0.24	0.04
2011	jan		0.05	0.03	Bottom
	feb		0.13	-0.01
	mar		0.22	0.00

(first column) The proxy for inflation (as it now stands without QE), drops from 53 to 5 (-48)
(second column) The proxy for real-output drops from 9 to -1 (-10) Ho-hum-- same as April>May --- where FED (capitulated, added federal reserve bank credit), cut the decline in monetary flows (MVt) in half

The drop in inflation is unprecedented. QE will be unable to offset
there's no real demarkation between inflation & deflation. it just seesaws.

[ThePythonicCow]

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

(first column) The proxy for inflation (as it now stands without QE), drops from 53 to 5 (-48)
(second column) The proxy for real-output drops from 9 to -1 (-10) Ho-hum-- same as April>May --- where FED (capitulated, added federal reserve bank credit), cut the decline in monetary flows (MVt) in half

The drop in inflation is unprecedented. QE will be unable to offset
there's no real demarkation between inflation & deflation. it just seesaws.

I don't know what these inflation and "real-output" proxies are, and I really don't know how or under what model or conditions you predicted the value of these proxies into the future.

Hence ... it seems I'm not quite understanding your post. Sorry.

[runlikehe11]

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

Great Article.. Thanks
Personally I like to see disinflation. Inflation is stealth robbery IMHO.

[jckb98]

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

Japan has recently taken a turn for the worse. Stuck between dependence on fiscal stimulus for growth and a shrinking tax base due demographics, matters will come to a head there within a few years. A friend who runs a hedge fund in NYC is worried “Japan lights up like a roman candle” within three years when I spoke to him last week. In a global economy as tightly coupled through trade and financial markets, the potential impact of a crisis

Hi EJ, can you finish this sentence if there is more substance in the missing parts? Thanks!

[FRED]

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

Great Article as always EJ.

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.

Any way you look at it, there is no evidence of deflation. The prices of imports have been rising sharply and steadily since early 2009.

2: EJ, your motivations, as I've understood them, for the government to execute on inflation, are due to them wanting to deflate away government debt. However a great article Why (Hyper) Inflation Is Not In the Cards (first posted by aaron) indicates the government (along with the Fed!) is largely controlled by financial interests who do NOT want to see their debt value decrease and that THEY will hold sway over the Fed and Gov's policies. It's a great counter-argument to the motivations you've supplied behind Poom! and I'd love to see your response regarding political-inflation-motivations to this article.

We don't expect hyperinflation but high inflation such as is occurring today in places like India and Venezuela.

Establishment economists may want to review the theory that inflation and unemployment cannot rise together: Inflation in India increased from 8% to 11% between 2009 and 2010 as unemployment increased from 7% to 11%.

Inflation in Venezuela increased from 19% to 30% between 2008 and 2009 as unemployment fell from 9% to 7%. In 2010 unemployment increased to 11% and inflation fell to 27%.

Contrary to the assertions of central bankers, inflation is not dead, and yes these are political not operational issues.

[MarkL]

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

Any way you look at it, there is no evidence of deflation. The prices of imports have been rising sharply and steadily since early 2009.

Fred: How does our Balance of Payments reflect prices/inflation? I mean... I'd expect there to be some correlation, but aren't there significant other factors besides price-changes that could affect the BOPGIMP/BOPSIMP? Certainly just American's buying more from America, or a spike in oil prices that affects shipping prices, or a general increase in DSO on the part of American companies, could affect Balance of Payments more than product price inflation.

And of course imports are only one part of determining inflation vs deflation. So is this graph really a great overall inflation data point? Teach me!

The India/Venezuela inflation/unemployment graphs are interesting... and I think reasonably possible here.

[rdrees]

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

Let me say that I applaud EJ for taking this issue head on. I think it has been the elephant in the room to a certain extent and addressing it on all fours is the hallmark of a true intellectual, which I believe EJ to be. I am convinced by some of what EJ has to say in this post and it's hard to argue with smaller cartons for the same price for certain products.

But I do have a couple reactions. First, as another poster pointed out (we_are_toast), I think this post amounts to sub-silentio revision of Ka-Poom. To say that we will have stealth inflation (which basically by definition has to be small enough not to notice it much) punctuated by disinflation is a different call than saying we'd have a brief period of disinflation ("Ka") followed by significant inflation ("Poom"). That's not a criticism (though I think the point could have been more clearly made). Models were made to be adjusted and improved in the face of new information. My personal opinion is that this new model hews much closer to my personal experience of this downturn and what it seems will happen in the short to medium term.

I'm basically an optimist at heart, and don't think the necessary end result is a currency event or default. Or if it is, I think it's a long way off. We should see it happen to other, large countries first with worse balance sheets than ours. I'm thinking Britain. For a large variety of reasons, including debt levels, geopolitical forces, and the fact that the dollar is the world reserve currency, I would be stunned if the US experienced a currency event before the UK did. When/if the UK suffers a currency event, well, financial armageddon may be right around the corner for us here across the pond. But it is very hard for me to imagine a scenario in which we would suffer such a calamity before they did.

As for the stealth inflation examples, as MarkL pointed out, this is anecdotal evidence and I find that kind of evidence to be next to useless. A person can always find anecdotal evidence to support their position. A deflationista could easily show you two goods next to each other that had "stealth price decreases" since 2007. Take cell phones. For the same price, you get more features today than in 2007. Stealth deflation! I bought a TV with LED backlighting in 2008 and it was one of the very first on the market and commanded a significant premium. Now, every other TV at Costco has LED backlighting. Stealth deflation! This anecdotal evidence is no less powerful, in my opinion, than boxes of ice cream standing next to each other. That's why I prefer cold hard numbers, like CPI or PPI. I recognize that there are imperfections and biases at work in those figures, like anything else, but it can't come close to the kind of manipulation you get both intentionally and unintentionally when relying on anecdotes.

I continue to be surprised at how much tussling there is on this site about how precisely to define deflation and disinflation. I like to keep things simple, so I say deflation is falling prices and disinflation is a slowing in the rate of rising prices. But whatever. What happened to the PPI and the CPI these last two years is a major outlier in US history -- and really the history of any country with an unlimited printing press. OK, so you compare it to the great depression and say "THAT'S deflation; this surely isn't." Well, I'm not sure I buy that. If you look at the H1N1 pandemic from last year compared to the great influenza of 1912, last year's outbreak pales in comparison. But it's still pandemic flu; to say otherwise is crazy. So just because we're not seeing deflation on the scale of the Great Depression doesn't mean it's not deflation. And if you don't like that word, fine. Just because we're not seeing a price event on the scale of the Great Depression doesn't mean we're not seeing a very significant price event. I mean, take a look at the disinflation from the 2001 recession: prices ALWAYS rose and ALWAYS rose at least 1%. Today, both CPI and PPI are lower than they were two years ago. WOW! We shouldn't pooh pooh that because it's not the greatest deflation history has ever seen. I mean, if I were to score this phenomenon, it looks like this is the second or third biggest deflationary event in modern economic history, with Japan in the '90s depending on how this plays out.

And finally, a few words about stagflation. Stagflation can result in the loss of purchasing power, but it is not, itself, loss in purchasing power. In other words, things other than stagflation can result in a loss in purchasing power. Like losing your job, even if prices are falling. Or when prices rise faster than growth in wages, even if the economy is growing. Or prices are flat while wages shrink. In fact, loss in purchasing power can occur (and often does occur) completely independently from any monetary factors. If the price of oil rises because there's less of it, the supply and demand curve tell us that prices will increase, even if monetary policy is "perfect" and there's been no increase in money supply or velocity. So I think we have to be wary of calling this stagflation too early. Maybe it is; maybe we'll see a wage-price spiral like we saw in the '70s. But I tend to doubt it. The more our numbers play out, the more it looks like Japan to me.

I will say this however: if stagflation like in India or Venezuela is what we really do see here, I promise I won't compare the figures to the '70s USA stagflation and argue that if it's not stagflation to the degree we saw then, then it's not stagflation at all.

[rdrees]

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

Very well stated. I just read the book, "The Black Swan" by Nassim Nicholas Taleb, and you've put your finger on one of his biggest messages: you can pretty much always find evidence to justify a theory. So evidence in favor of a theory is not particularly meaningful. But just one piece of evidence can disprove a theory, so we should trust things that are disproven far more than theories that appear to have evidentiary support.

I look at CPI and PPI today and find that they are lower than they were two years ago. That, to me, disproves the theory that you can never have deflation in a modern economy. Now, maybe you can't have a major fall in prices, or maybe you can't have many consecutive months of falling prices, but it's pretty objectively clear that you CAN have a fall in prices. We've learned that it's just not accurate to say otherwise.

I also think it probably should have been more clearly acknowledged that EJ has subtly but significantly moved the debate. It used to be about inflationistas vs. deflationistas. Now it's about deflation vs. disinflation with disinflation defined to include bouts of falling prices. That's a pretty significant concession right there, and no longer is it "classic" Ka-Poom theory.

But I have to cut EJ a little slack. Should he have come right out and said "I must revise Ka-Poom in light of the evidence?" Yeah. But he's a businessperson selling his services on this site and straight up admitting a mistake might be bad for business/PR. At least he's adjusting his model, even if not necessarily explicitly. My hat's off to the guy for providing quite a lot of very sophisticated commentary and analysis for free and facilitating a vibrant and engaged community of thinkers.

But yeah, I agree with you.

[cindykimlisa]

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

I too have some issues with the Bryers issue. I do all the shopping and when Breyers was one half gallon a few years ago it was almost always $3.99 per half gallon and very few sales per year. At the 1.5 quart size I find it is often priced at $3.99 per gallon but far more often it is on sale for 2.99 or 2.50. Also the regular price for the small size now at target and walmart is always 2.29, a major reduction which has coincided with the reduction in quanity.

In fairness to this analysis, snak food has been evolving lower in quantity while the price has remained the same but with more sales at the grocer.

Cindy

[metalman]

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

read 'em & weep, deflationistas...

Wal-Mart prices on the rise: JP Morgan study
Tuesday August 10, 2010, 6:48 am EDT

(Reuters) - Wal-Mart Stores Inc has raised average prices at its stores by about 6 percent in a month, according to a recent study in Virginia.A check by J.P. Morgan Securities said average prices at the Wal-Mart Supercenter in Virginia were upped by 5.8 percent, the most significant sequential increase since it started the study in January 2009.

The world's largest retailer is still the cheapest bet among supermarkets, but traditional rivals like Kroger Co and Safeway Inc are gaining ground -- in July Wal-Mart had a 10.4 percent lead relative to a 16 percent lead in June, JP Morgan said.
Rising costs of raw materials and oil are pressuring companies across the board. Companies are passing on some of the input costs to consumers by rising prices as they try and guard margins.

Safeway also raised prices by a modest 1.1 percent. Competitor Kroger, on the other hand, has cut prices 1.3 percent from June to July, as it tries to remain competitive.

[magicvent]

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

My husband just brought home what he thought was a half gallon of orange juice. Surprise -- the 64 oz just became 59 oz.