Inflation Re-visited: Uncle Alan & Prof. Jim Chime In
Earlier we took a kinda deep dive on inflation and found that for both CPI and PPI, as well as for
Core and Total (i.e. including food & energy) things were fairly benign.Fighting the Wrong Fight: Inflation Real & Imagined
In other words the YoY% change in each didn't indicate any big uptick in inflation. What we did find that was alarming was that over the last couple of years there's been a wide and accelerating divergence between CPI and PPI. Which indicates two strategically important things:
- As the divergence continues the pressure on profis and earnings will increase thereby lowering the outlook for business performance and, this being a rational world for the sake of discussion and posting, stocks have an increased risk.
- And the chances of PPI increases, particularly with China making a major structural shift from an exporter of deflation to an exporter of inflation, the chances of the PPI growth spreading to consumer prices increases. And of course the recent re-accleration of oil prices just adds fuel to that fire (sorry, pun unintended but left because it amuses me anyway).
You can see all these points in the accompanying chart which shows the YOY changes as being benign and apparantly downtrending but the PPI vs CPI gap growing.
One key thing though: notice that the traditional view of core vs total was valid until Jan04. And that the accelerating divergence between PPI and CPI began at the same time. That seems to me that the argument that we're seeing a major structural shift in things because of the changes in the worldwide energy markets might be very well grounded indeed !
Having re-set the table, so-to-speak, it was extremely interesting that Uncle Alan made some similar points on CNBC today. And also that Prof. Jim Jubak said something pretty close and they discusses Wall St.'s sanity quotient. You'll have to watch the vids to find out what but you can probably guess.
What's particularly interesting today is that Uncle Alan was on CNBC (again :) ) and made some rather pithy comments on inflation. First, that the standard assumption that F&E can be excluded because they represent noise may no longer be valid. Let's all stop for a minute and savor that. The second really interesting thing he mentioned was the resulting growing gap between PPI and CPI and the implications thereof.
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Are inflation numbers legit? (Video Here )Recently released inflation data show a big gap between the core number, which excludes energy and food, and the headline number. But MSN Money’s Jim Jubak says Wall Street is "nuts" to be ignoring recent energy price increases.
Our biggest export: Inflation by Jim Jubak, 10/5/2007