Thursday, September 16, 2004

How long until the word "deflation" returns to the business pages?
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in August, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The August level of 189.5 (1982-84=100) was 2.7 percent higher than in August 2003. . . .

The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) was unchanged in August on a not seasonally adjusted basis. The August level of 110.3 (December 1999=100) was 2.1 percent higher than in August 2003.
While the media runs about crowing how this means the Fed can hold off on its interest rate hikes, it is not looking at some pretty interesting trends of late which take us right back to the deflation-scare days of late 2003.

After seasonally-adjusted monthly overall inflation jumps earlier this year of 0.5% (Jan. and March) and 0.6% (May), things have cooled down considerably. The two lowest monthly price rises of the year have occurred in the past two months. After peaking in June at 3.2%, the annual inflation rate is now down to 2.7%. Catching the more recent trends, the seasonally-adjusted CPI over the last three months is up a mere 0.3%, the lowest level since December 2003. The compound annual rate for the 3 months ending August 2004 is but 1.3%.

After holding steady for four months, the seasonally-adjusted core inflation rate is beginning to fall as well, to 1.7% in August. The core CPI compound annual rate for the 3 months ending in August is down to 1.0%, again a level not seen since the deflation-scare days of Fall 2003.

Food prices are finally beginning to fall, in response to a summer-long collapse in raw foodstuffs and wholesale food prices. The CPI for food at home changed -0.2% in August. Commodities prices overall are sinking markedly, falling two months in a row. Commodities prices are at -0.6% since June, and for core commodities CPI is -0.4% since June. Amazingly, core commodities have experienced outright annualized deflation consistently since December 2001.

[As an aside, the annual inflation rate for new cars, one of my favorite bits of data, is now -1.1%. Since peaking in September 1996, new car prices in August have changed -6.3% in nominal terms; in real terms, it is a whopping -22.0%!]

Commodities are 40% of the CPI, and the US economy is positively waylaying the necessary underlying conditions for their domestic production. We import more and more (which tends to only exacerbate commodity deflation), driving up the current account deficit, borrowing from China and Japan to keep the cycle going, and stoking the bonfire for the inevitable conflagration.

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