Yesterday, analysts celebrated the unexpected .3% drop in the comprehensive “headline” Producer Price Index (PPI), while ignoring the greater than expected .2% increase in the “core.” Today, those very analysts are trumpeting the less than expected .1% increase in “core” Consumer Price Index (CPI) while downplaying the greater than expected .3% gain in headline CPI. This is a classic example of “heads I win, tails you lose.” When the headline number is up, they tell us to ignore it in favor of the “core.” But when the headline is down, suddenly its relevant.
Lest we miss the forest for the trees, year-over-year, “core” PPI is in fact up 2.5%, compared with a rise of just .8% a year earlier. This represents a one year increase of over 200%, which if repeated, would result in next year’s core PPI rising over 7.5% The drop in June PPI is at best an aberration, as most of the .3% decline resulted from a 1.6% drop in overall energy prices, and a 5% drop in gasoline prices. However, this pullback occurred during a month in which crude oil prices plunged from a record high of $42 per barrel down to $35.50. One can hardly ignore the fact that thus far, during the first two weeks of July, crude oil prices are already back up to $41. Given that the month is only half over, and the current price momentum, I wouldn’t be surprised if crude oil prices rose to $43-$45 per barrel by the end of the month. Where that to occur, July’s PPI gain would probably be an all time record. However, under such circumstances, I’m sure analysts would again be telling us not to worry, because “core” prices were only up slightly.
What’s worse, today’s “benign” CPI data, Which Wall Street is touting as evidence of easing inflation has blinded financial and media analysts to the much more tangible and objective inflationary evidence that is occurring right under their noses. In fact, in today’s trading, the dollar index is plunging to the point where it is approaching multi-year lows and crude oil has resumed its rapid upward trajectory, to the point where it is close to a new contract high. Both of these moves are unmistakable signposts on the road to higher inflation.
For the first half of 2004, the CPI is already up 2.5%. Given that most analysis are still calling for 2% inflation in 2004, the CPI will have to fall by .5% during the next six months to make that dream a reality. More likely, given the renewed weakness in the U.S. dollar (the dollar index has now fallen for the fifth consecutive week, with the dollar hitting a twelve year low against the British pound) and surging energy prices (crude oil today trading near $42 per barrel) , the second half of 2004 will most likely see a larger increase in the CPI than did the first. The result will be that CPI will more likely increase by 6% or 7% for the entire year. Given that creative government accounting understates the true increase in consumer prices, it is my opinion that a more accurate computation would probably reveal a 2004 CPI gain closer to 10%.
Since the Fed has done nothing to contain the growing inflation threat, but instead has continued to stoke its flames, 2005 CPI increases should be twice as large as those experienced during 2004, putting U.S. inflation solidly into double digits. I wonder just how high inflation will have to rise before Wall Street analysts stop pretending that it will still only be 2%. Wishful thinking is one think, but this is getting ridiculous.