Inflation Sharply Higher, Industrial Output Lower
Some Scary numbers from the Labor Department and the Federal Reserve
By blackhedd Posted in Economy — Comments (22) / Email this page » / Leave a comment »
Wire-story here. I'll let you digest the headline for yourself. The key point from the Labor Department is that consumer prices rose 4.1% in 2007, against 2.5% in 2006. Essentially all of the increase is from sharply higher food and energy prices.
In the meantime, the Fed reports that industrial output was flat in December, after falling in October and rising less than expected in November. You probably remember how surprisingly good the third-quarter GDP number looked, at an annualized 3.9%. Something tells me that GDP for all of 2007 will (ahem) not be as good-looking.
The Fed excludes food and energy prices from its preferred inflation measure (called "core inflation"). When we get a reading on both 2007 GDP and core inflation, we'll have some idea of the real (as opposed to the nominal) performance of the economy. It too is unlikely to look good.
From a policy perspective, the measurement of wage increases is the key takeaway from this whole batch of reports. Real (inflation-adjusted) wages fell 0.9% during 2007.
That sounds awful, but there's a silver lining. It proves that the inflationary pressure coming from food and energy prices is not feeding through to labor costs and being passed along as higher prices for finished goods.
Why does that matter? Because the latter kind of inflation is exacerbated by monetary easing. As long as labor costs remain under control, the Federal Reserve has more freedom to combat the economic slowdown with lower short-term interest rates.
Sorry I don't have time for a longer analysis. Feel free to have at it in the comments.
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A more accurate method of measuring inflation needs to be devised.
...a long habit of not thinking a thing wrong, gives it a superficial appearance of being right...
---Thomas Paine---
Inflation is not the rise in prices of goods and services such as oil and gasoline. Inflation is the decrease in the value of money as a whole. One could argue the government does not even measure inflation the right way. The decline in the dollar is a sure sign of inflation, proved by the free market. That is being reflected in the price of oil and raw materials. Its not these commodities that are going up that drive inflation. They only reflect what is already happening.
The inflation is not feeding into labor costs. The workers are just making less money overall even if they make the same number of dollars.
The inflation in this economy looks to be a whole lot worse than the government is measuring.
Any more, the American worker gets hit no matter what he or she does.
Ethanol.
At least corn based ethanol. Its putting pressure on both food and fuel prices.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
The money quote:
Essentially all of the increase is from sharply higher food and energy prices.
I expect it to get worse.
Thanks to ethanol subsidies and the push to "go green", we are now using food for fuel, driving up the cost of food for everyone.
No new refineries. No new domestic oil drilling. Demand is up and supply is the same, hence higher prices at the pump. Which of course translates to higher costs to transport goods which are passed on to the consumer.
All thanks to the Church of AGW.
www.scottbomb.com
Click here to donate to the Fred Thompson campaign.
Seeing as Corn based ethanol isn't at breakeven in economic terms and is questionable in thermodynamic terms.
______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
You may recall our "magic spigot" discussion. Bush is now personally pleading with Saudia Arabia to increase oil production:
http://www.abcnews.go.com/US/Politics/story?id=4141964&page=1
Why would he be doing that if there was no more production capacity? Why would he go to the King of the most powerful member of OPEC if they don't have the power to set prices?
Those are rhetorical questions (although you may answer them if you wish). Yes, this comment is off topic, but I didn't feel the need to do a whole post about it. Besides, I was just bursting to say "I told you so."
...necessarily make it an intelligent question. You may have noticed how the Saudis responded. They said something like "the market sets the appropriate level of production," which loosely translated from the Arabic means "pound sand, Mr. President."
The Saudis, the Kuwaitis and the Emirates are believed to have unused production capacity at the current moment. All of them could pump more if they want to.
I'm inclined to believe the Saudis when they say that capacity is not the problem in the crude oil market. I think monetary factors are more the problem. Expectations of much lower interest rates in the US are giving financial speculators a good reason to buy up oil.
More evidence? Look at US prices for gasoline and distillates (heating oil, diesel, jet fuel). They're up, but not nearly as much as crude oil. And downstream companies (Valero for one, half of Exxon-Mobil for another) are taking it on the chin, because their profits for refined products don't make up for their higher feedstock prices.
You didn't make a credible argument for OPEC not being able to influence the price of oil then, and you aren't credible now.
Your reluctance to admit error is interesting (but not surprising). Claiming that Bush is a dolt is a cop out.
Glad you admitted (kind of) that OPEC does have additional capacity, which you stridently denied before citing huge "obstacles" and the "no magic spigot" speech.
The rest of your comment is just throwing things to see what sticks. Oil speculators as the boogey man of high oil prices has been repeated often (I've just never seen any evidence to back it up). Sounds rather like a conspiracy theory approach to explaining what is right in everyone's face: OPEC was created to control the price of oil (in response to the seven sisters cartel). They continue to succeed in greatly influencing the price of oil today.
My understanding of OPEC is that it is something of a joke today. Yes, yes, we all know that in the 1970's OPEC nations were able to work together to restrict the supply of oil and thus increase oil prices. Unfortunately for OPEC, and fortunately for the rest of us this type of supply manipulation had consequences.
In consequence, to OPEC manipulations of oil supplies in the 1970's a massive global wave of oil exploration started. People, began to look for new sources of oil in new locations, and as a result many non-OPEC countries such as the UK, Norway, etc. became major oil producers. The rise of new non-OPEC oil producers have since hampered OPEC attempts to manipulate supply.
Moreover, OPEC success in the 1970's provided increased incentives for "cheating" among OPEC members. Now I do not have time to explain this in great detail, but OPEC is a cartel, and cartels have certain long and well document microeconomic flaws. One of the best known microeconomic flaws of cartels is "cheating." In essence, it is in the interest of every cartel member to "cheat." In consequence, the longer a cartel exists the more each member "cheats."
Now you maybe confused as to what I mean by "cheating," so here is an explanation. Cartels are created in order to artificially create monopoly power. Each member of a cartel has a maximum production quota. It is through the manipulation of its members maximum production quotas that cartels are able to control the supply of a product, and thus influence its price. Now, each producer in the short run benefits from the cartel relationship via high sale prices, but as soon as prices are artificially heightened cartel members start to find that they can benefit more by selling in excess of their quotas (this is cheating). Effectively, the first cartel member that cheats enjoys the greatest benefit from cheating. Each successive "cheater" enjoys a diminish benefit from cheating, so obviously every rational producer in a cartel wants to be the first cheater (after the cartel artificially drive up price). Now each act of "cheating" increase supply some, so it effectively undermines the effectiveness of the cartel's supply manipulation. As more, and more cartel members "cheat" the ability of the cartel to effect supply diminishes until it becomes completely ineffective. It is my understanding that this is what has happened to OPEC. OPEC maximum production quotas have in effect become minimum production quotas.
...a long habit of not thinking a thing wrong, gives it a superficial appearance of being right...
---Thomas Paine---
"Why would he be doing that if there was no more production capacity? Why would he go to the King of the most powerful member of OPEC if they don't have the power to set prices?"
I can think of a whole lot of reasons why he might do that.
#1. Many, many Americans remember the 1970's, and assume that OPEC still matters. A publicized trip to ask "OPEC nations to open the spigots" could play well with people that have been upset about the rise of gas prices over the last few years.
#2. Cover. A publicized trip to Arabia to ask "OPEC nations to open the spigots" could be used to as cover for high level talks related to the Arab support/involvement in the War, peace in Israel, terrorism, or any of a host of other issues that the President could get the Saudis to help with covertly, but never publicly.
#3 Headline Oxygen Theft. There are partisan advantages to foreign trips by the president. The MSM coverage of presidential trips tend to take headline coverage away from the democrat congress.
...a long habit of not thinking a thing wrong, gives it a superficial appearance of being right...
---Thomas Paine---
I can't see it right now. Being in the lower middle income level, I've felt the effects of this a lot quicker than others with higher income levels. I used to be able to put back money every week for the hard times. I can't do that anymore because of not only the increase in prices of goods and fuel but higher taxes at the state and local level. Utility rates rose three times last year. Sales tax have gone up as well since 2006. Now, I juggle from one week to the next with little to nothing left over. If really hard times hit, I'm going to be in a world of hurt.
at a deep discount after they foreclose.
A rate cut primarily helps the banks (since they only pass a fraction of the cut to you) and the banks are not laying off tens of thousands of folks so they can help you refinance your mortgage - they know the home loan market is shrinking fast and are preparing for it.
Expect default rates on auto loans and credit cards to increase, then by spring, we will be seeing the first of the commercial loan defaults.
Prepare for extensive pandering and posturing from Congress and the Executive branch with very little being accomplished.
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"Enlightened statesmen will not always be at the helm." -- James Madison
...to your point about rate cuts. I think it's a pretty reasonable expectation that if the Fed cuts the Fed-funds rate well below market rates a little farther out on the yield curve, that a lot of banks will use the opportunity to mainline on cheap money and rebuild their balance sheets. The process might take multiple years.
Is that a bailout? Well, it's a gray area at best.
but I don't see much intelligent talk that would help the markets. Economic stimulus packages (a la Hillary) that increase entitlement programs - further driving the federal government in the red will not help.
I mention commercial loan problems, not as an expert in that area, but I have had several consulting jobs during the past few years that resulted in $20+M commercial loans and was amazed at the lack of due diligence by the banks. Several of these deals are falling apart now.
The market's been trading like a scared kid afraid of his shadow this month. I rarely stay in anything even overnight. Pure hit and run daytrading - not my strong suit, but at least I'm green for the month.
Been seeing plenty of cutbacks in commercial construction. Projects being cancelled, construction departments being eliminated..
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"Enlightened statesmen will not always be at the helm." -- James Madison
the boom and bust cycles of a commodity driven economy for my whole adult life, I've learned that the one thing you must do is stay sound enough and liquid enough to be able to take advantage of your "neighbor's" misfortune! I really like doing business with people who desperately need money.
In Vino Veritas
To turn your food into fuel.
I don't suppose anyone wants to talk about the obvious, no drilling, no refineries, no nuclear, what do you get? Sky high energy prices, which effect the cost of everything.
Question, how is a CO2 molecule produced by burning Ethanol, a CO2 module produced by burning gasoline, a CO2 module produced by burning coal, and a CO2 module produced by exhaling different from each other. Answer, it's value varies with the taxes :-)
I know I sound like a broken record, but ethanol prices are falling, as ethanol demand drops. Ethanol's primary use is as a motor fuel in localities that mandate it (like northern states in the wintertime).
The demand for motor fuel is falling. (Why? Don't know. Could be that higher prices have tamped down demand. Could also be because the economy is slowing and people feel less wealthy. Could be both.) That puts downward pressure on both gasoline and ethanol.
Anecdotally, there is far too much ethanol production capacity in the Upper Midwest, and expectations are that much of it will be shut down during 2008.
But oddly enough, prices for corn are at all-time highs, with no end in sight.
Prices don't lie. Something else is going on.
"The demand for motor fuel is falling...prices for corn are at all-time highs, with no end in sight."
Speculation opportunity?
...a long habit of not thinking a thing wrong, gives it a superficial appearance of being right...
---Thomas Paine---
Whenever you have a good idea, it's axiomatic that 50,000 people thought of it ahead of you and already pushed the price up.
How do I know that in this case? Because I already tried.
:-)
Inflation doubled last year!
That sounds horrible. However it's important to point out that the year before that, we were at levels of employment considered full or overfull by the old time Keynesians, while simultaneously keeping inflation at lows not seen since the end of the Gold Standard.
We just need to make sure that inflation doesn't continue to grow at that rate, heh.