Wednesday, January 19, 2005

The December CPI report shows "stay the course" is this economy's motto on prices. Overall consumer prices fell 0.1% while core (non-food, non-energy) prices rose 0.2%. Consumer inflation now stands at an annual 3.3% although much of that number is due to energy inflation running at 16.6% annually. Core annual CPI is a much more tame 2.2%, and over the last three months an even lower annualized 2.0%.

That being said, inflation is actually starting to invade my favorite deflationary sector, core commodities. Core commodity prices dropped a dramatic 0.6% in December, but on the year core commodity inflation is +0.6%. For three months running now there has been core commodity inflation in the US, after 34 straight months of annual deflation. 2005 may see the first year of core commodity price inflation since 2001.

The falling dollar may finally be starting to have its price effect even if it has completely failed to have its trade deficit effect. The non-fuel import price index is up 3.0% on the year -- not nearly as much as the dollar is down (-4.9% for the year per the broad dollar index) but nonetheless a notable figure.

Inflation is even seeping into housing. We all know the story of runaway housing price inflation, but the standard story to explain it all away has been that, thanks to ultra-low mortgage rates, monthly payments have not been rising much. The December CPI report tells us that owners' equivalent of rent (OER) is up 2.3% on the year after bottoming out in January-February 2004 at 1.9%. In bubbly Los Angeles-Riverside-Orange County the OER inflation rate is a much steeper 5.6%, the highest level in nearly three years. More telling for the fate of housing markets are payments for new mortgages. DataQuick tells us that from December 2003 to December 2004 the average new mortgage payment in Southern California rose a steep 21%.

How are Americans affording to chase after all these goods and services? It surely isn't their rising wages and salaries. Real average hourly earnings in private industry stand at $8.23 in December, up $0.01 from October and November but down from a recent high of $8.32/hr. in November 2003. Real hourly wages changed -0.7% from December 2003, and for all of 2004 real hourly wages changed -0.4% -- the first year real hourly wages fell for since 1993!

One way to make more money to chase more goods and services is to work longer hours, and Americans were certainly doing that in 2004. Aggregate weekly hours (SA) in December rose to their highest level since September 2001, and for the year stood at the highest level since 2001.

Another tried and true measure is through debt. The December numbers on consumer credit aren't in yet, but we do know that from November 2003 to November 2004 revolving credit grew by $37.6bn or 5.1%. In nominal terms, over the same period wages and salaries were up 4.6% while consumption rose 6.1% -- so a little extra debt helped grease the consumers' skids.

The "fundamentals" all say "deflation", but consumer power and inflation continues to be created through ultra-loose monetary policy in every corner of the globe. Stephen Roach thinks this just can't last. But ever since the mid-1990s the US economy has been all about inflating asset prices, debt- and wealth-effect consumption. Somebody is going to have to stop us, because we aren't about to stop ourselves.


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