Thursday, October 15, 2009

Inflation Cools Off? No Inflation to Begin With

CNN's headline of this morning's CPI release was "Inflation Cools Off". My question... what inflation? Take this anecdote of the "inflation" in the system. USA Today details:

Colorado will become the first state to reduce its minimum wage because of a falling cost of living.

The state Department of Labor and Employment ordered the wage down to $7.24 from $7.28. That's lower than the federal minimum wage of $7.25, so most minimum wage workers would lose only 3 cents an hour.

Colorado is one of 10 states where the minimum wage is tied to inflation. The indexing is thought to protect low-wage workers from having flat wages as the cost of living goes up.

But because Colorado's provision allows wage declines, the minimum wage will drop because of a falling consumer price index. It will be the first decrease in any state since the federal minimum wage law was passed in 1938.

Take the bottom left chart with a grain of salt as the three biggest components of CPI are Housing, Food and Beverage, and Transportation (i.e. the bottom three in the chart).

Source: CPI


  1. Jake,

    What's amazing to me is how much senseless money creation (debt) it has taken to keep the CPI inflation rate positive. And most of the debt had to be targeted at household CONsumption too just to keep prices from falling. It's been a boon for Wall St. and a bane for Main St.

    By all rights, CPI should have been negative 2-3% annually over the past 15 years.

  2. Jake,

    i fear that the markets have become too complacent about inflation.

    or maybe they don´t want to see the obvious.

    the favorable year over year comparisms are coming to end end.

    the huge drop in commodities (=energy) drove the headline CPI into deflationary territory (while the core was rising for the most part through the crisis).

    but this is over. take a look at charts of oil oder gasoline or whatever commodity and watch the yoy gap widen dramatically over the next months.

    i just don´t see it as guranteed as the markets do that the fed can maintain ZIRP throughout 2010.

    maybe it really takes a hot number to print on paper that fixed income investors finally wake up.

    "what? headline inflation is 3% and i´m stuck with 3% treasuries? wait!..."

    with no more room to hide behind negative CPI prints there will be a lot of pressure on the fed and even more on their european sister.