Inflation admission sends DOW reeling

[FRED]

At one point today the DOW was up over 100 points. It plummeted to negative 100 territory before recovering to close off 63 points. The reason for the turnaround? European Central Bank governing council member Axel Weber opened a window and let in some fresh air. He said the bank may need to raise interest rates to a level that restricts economic growth to keep inflation under control.

ECB's Weber Says Interest Rates May Need to Become Restrictive
Oct. 11, 2007 (Bloomberg)

"Price increases are taking place on a broad front and are no longer limited to energy and volatile food prices," he said.

Compare this to the most recent flatulent comments on inflation in the minutes of the Federal Open Market Committee from the September 18, 2007 meeting. The FOMC members "...recognized that incoming data on core inflation continued to be favorable, and they generally were a little more confident that the decline in inflation earlier this year would be sustained. Inflation expectations seemed to be contained, and the less robust economic outlook implied somewhat less pressure on resources going forward."

If you eat, pay taxes, or fill your gas tank, you know the Fed's assertion stinks. Even the government's own data point to a distinct change in inflation trends starting in 2004.

The Fed occasionally talks about oil prices as driving inflation, as if the money needed to pay for the oil prints itself. Also up since 2004?

With the ECB talking hawkish right after the Fed paves the way for further rate cuts with soft talk on inflation, small wonder the dollar dropped and gold rose.

Soon enough the entire world is going to need a coordinated Paul Volcker early 1980s style inflation smack-down, recession and all. But the economy and credit markets are far from out of the woods, so at this point the risk of creating a worse event than recession remain too high. Demand slowing due to the collapsing housing bubble combined with rising inflation are taking their toll on retailers, which are also, as usual, blaming the weather.

Retailers Report Slow September Sales

Sales are coming in soft, as expected," said Ken Perkins, president of RetailMetrics LLC, a research company in Swampscott, Mass. "It was a perfect storm, a combination of abnormally warm weather, high food and energy prices, a continued sluggish housing marketing and tight credit."

Fresh victims of the credit crunch are appearing over the horizon.

Is Commercial Real Estate The Next Subprime?

Mounting evidence suggests bubble conditions may be emerging in US commercial real estate valuations, CreditSights warns in a new report on the sector.

The recent boom in non-residential construction has almost entirely made up for the slump in residential investment, in turn significantly increasing the economy’s dependence on the commercial real estate sector, CreditSights says in Bubblenomics - Hunting for the Next Subprime in Commercial Real Estate. An even bigger problem may be overinflated commercial real estate prices, the report says.

Maybe fund managers can keep the DOW up for the rest of the year to collect bonuses, but not if a fresh credit crisis hits, inflation remains high and central bankers grow bold enough to talk about it in public.

[sparki]

Re: Inflation admission sends DOW reeling

Moin from Germany,

unfortunately i think you give the ECB way too much credit.

Watch how they act and not what the do.

The ECB has only one goal "price stability". At the same time they have a target of 2 percent and want M3 to expand close to 4-5 percent. (?)!

In reality they have played "chicken little" and missed the opportunity to raise rates at their last 2 meetings. They have admitted that the inflation rate will be well over their target over 2 percent for at least several month and M3 is soaring (lately over 10 percent) for years....



At least they havn´t fully adopted the "core" view from the Fed..... :-)

[FRED]

Re: Inflation admission sends DOW reeling

Moin from Germany,

unfortunately i think you give the ECB way too much credit.

Watch how they act and not what the do.

The ECB has only one goal "price stability". At the same time they have a target of 2 percent and want M3 to expand close to 4-5 percent. (?)!

In reality they have played "chicken little" and missed the opportunity to raise rates at their last 2 meetings. They have admitted that the inflation rate will be well over their target over 2 percent for at least several month and M3 is soaring (lately over 10 percent) for years....



At least they havn´t fully adopted the "core" view from the Fed..... :-)

The fibbing/action ratio is relative. The ECB is at least indicating an inflation problem while EU M3 and inflation rise above targets. The USA's M3 and inflation are rising even faster yet the Fed says inflation is trending down.

Click for source: nowandfutures.com

It's important to understand two factors that help explain the difference in the ECB and Fed inflation perspective:

1) European countries tend to use the inflation numbers to measure consumer inflation and predict consumer behavior. Spain, for example:

"The degree of CPI representativity is determined by the adaptation of this indicator to the economic reality of the day; thus, the variation rate calculated will be more approximated to the evolution of the set of economic prices the more elements selected for measurement for consumer behaviour guidelines are adapted. To achieve this, the articles selected that will form part of the shopping basket must be those most consumed by the majority of the population, the sample establishments must be the most visited and the importance relative to each article in the shopping basket must respond to consumption tendencies of households. The better the selection of these elements the more representative this indicator is considered."

The Bureau of Labor Statistics and the Fed are not at all interested in measuring inflation as it impacts consumers, unless by "consumers" one means consumers of Treasury bonds and other government debt. The formulation of the US CPI is meant to give institutional and government bond fund managers a way to achieve their benchmarks. They are not paid to question the validity or accuracy of the CPI, they are paid to meet or beat their benchmarks, and to the extent that all other bond fund managers are using and making decisions based on the same data, they do. The exception is a small number of individual bond investors–so-called bond vigilantes–who may think to question the official CPI numbers and come up with alternatives, and an even smaller number who act on these alternatives. No one knows, but we guess that the percentage of such bond vigilantes is no more than in the single digits in terms of total bond value owned or managed.

2) While M3 may be rising dramatically, all-goods inflation is not correlated. That's because most of the money is pouring into the FIRE Economy where continuous asset price inflation is the intended outcome. Of course, it's not pouring into the residential real estate segment of the FIRE Economy today. In fact, a fair amount of M3 is heading up to money heaven from that sector as we write. Instead, it has been pouring into the commercial real estate segment and others. (Note the cranes littering the sky in your city, where ever you are.) Empty office buildings are purchased, inflated, and re-sold and re-depreciated over and over. As the story above notes, this too will soon come to an end. M3 will continue to grow, however, and we will continue to try to figure out into which segment of the FIRE Economy all the fresh money is going. Still betting on Infrastructure and Alternative Energy.

[GRG55]

Re: Inflation admission sends DOW reeling

At one point today the DOW was up over 100 points. It plummeted to negative 100 territory before recovering to close off 63 points. The reason for the turnaround? European Central Bank governing council member Axel Weber opened a window and let in some fresh air. He said the bank may need to raise interest rates to a level that restricts economic growth to keep inflation under control.

ECB's Weber Says Interest Rates May Need to Become Restrictive
Oct. 11, 2007 (Bloomberg)

"Price increases are taking place on a broad front and are no longer limited to energy and volatile food prices," he said.

Compare this to the most recent flatulent comments on inflation in the minutes of the Federal Open Market Committee from the September 18, 2007 meeting. The FOMC members "...recognized that incoming data on core inflation continued to be favorable, and they generally were a little more confident that the decline in inflation earlier this year would be sustained. Inflation expectations seemed to be contained, and the less robust economic outlook implied somewhat less pressure on resources going forward."...

Orchestrated piling on?

Oct. 12 (Bloomberg) -- The dollar headed for a weekly decline against the euro...

...Fellow ECB policy maker Nicholas Garganas said inflation is ``likely'' to top the bank's 2 percent limit next year, Dow Jones newswire reported citing an interview.

The ECB held its key rate at 4 percent last week, saying it needed to assess the economic effect of rising global credit costs and the U.S. housing slump. Central bank council member Klaus Liebscher also said the euro's gains are cushioning the impact of soaring oil prices...

Link to article:
http://www.bloomberg.com/apps/news?p...d=aaCLdtW8zwI8

[GRG55]

Re: Inflation admission sends DOW reeling

This item caught my attention because it combines a number of prominent and growing issues; the fall in purchasing power (even for those who never leave the USA), future inflation concerns, and the growing worker-management income gap. Note the reference to "annual cost of living increases"; another reminder of the stagflationary '70's.

Pilots represent quite a small part of airlines total operating labour costs, have a high front end training cost to the airline, and there's no easy substitution in part due to FAA and IATA safety regulations, so they have more bargaining power (in the good times) than any other union in the sector.

If the pilots are successful which of the following is the most likely official response?

1. Pilot's salaries will join food and energy as exclusions from core inflation;
2. Pilot's salaries will be hedonically adjusted as the BLS assumes people will substitute Amtrak for AA;
3. Paulson will point to sharply higher pilot's salaries as proof of a "strong economy";
4. Bernanke will state that inflation expectations remain "well anchored"...because airplanes don't carry anchors;
5. All of the above...

American Airlines' pilots union seeks 53% pay raise

By TREBOR BANSTETTER
McClatchy Newspapers
Published on: 10/23/07
Fort Worth, Texas — American Airlines' pilots have asked for a hefty boost in pay and benefits, a proposal that analysts said would likely lead to long and arduous contract negotiations at the world's largest airline.

The proposal, presented to the airline Tuesday, requests a one-time raise that would restore pilot salaries to 1992 levels, when adjusted for inflation. If approved by May 2008, that would mean a raise of about 53 percent.

The union also asked for future annual raises of 6 percent and annual cost of living increases, and a signing bonus that totals 15 percent of a pilot's earnings between July 21, 2006, when talks began, and the effective date of the new contract.

Labor leaders said the proposal restores purchasing power that pilots have lost since 1992 to pay cuts and inflation. They point out that American's executives have enjoyed a substantial increase in pay in recent years while pilot earnings have fallen.

"Inflation has killed our purchasing power," said Karl Schricker, an American pilot and spokesman for the Allied Pilots Association, which represents the 12,000 pilots at the Fort Worth-based airline. "Senior management, meanwhile, has seen theirs go up over 500 percent."

Link to article:
http://www.ajc.com/business/content/...ICAN_1023.html

[jk]

Re: Inflation admission sends DOW reeling

pilots' salaries don't have to be removed from cpi because they were never in cpi in the first place. pilots are inputs not hired directly by the passengers. the cost of an airline ticket might be in cpi, however, so the issue is whether this leads to higher ticket prices. that leads me to the question of fuel costs- if the bls excludes energy costs, do they exclude the bump in ticket prices when fuel costs rise, or do they only exclude it if it's called a "fuel surcharge"?