No inflation in May. The headline Consumer price Index fell by 0.2%. That’s the second monthly drop in a row after April’s 0.1% decline.
Nobody needs to worry about the Federal Reserve raising interest rates to fight inflation any time soon.
No deflation in May either—by a tad.
The drop in the May headline rate came on a 2.9% decline in energy prices, which was itself based on a 5.2% fall in gasoline prices. Most of that, however, was due seasonal adjustments. Non-seasonally adjusted gas prices actually rose 0.7%.
All that added up to a tiny increase in the core inflation rate—that’s inflation minus changes in food and energy prices and that is the inflation rate that the Federal Reserve watches–of 0.1% in May.  On an annual basis the core Consumer Price Index is up just 0.9%. That’s the lowest annual increase in the core rate since 1966.
A 0.9% core inflation rate certainly isn’t enough to reassure those who worry that the U.S. is in danger of slipping into deflation. But at least the rate remains in positive territory.
You had to look only to another statistical release this morning for an explanation for the drop in headline inflation in May and the tiny increase in the core inflation rate. Initial jobless claims rose last week by 12,000 to 472,000. Economists had expected a decline to 450,000.
With so many people unemployed, it’s not surprising that prices aren’t climbing.
“The Great Depression was NOT inevitable, but rather a result of the wrong-headed policies of both Hoover and FDR.”
Show me the proof. We can say this all we want but we cannot hope it to truth. I still hear screams about how the terrible Smoot-Hawley tarriffs were prolong cause #1 regardless of how ridiculous economists have shown this to be. I still here Ronald Reagan as prime example of cutting taxes and spending, which is outlandish. He’s a Keynesian poster boy, and probably the best proof that stimulus works great as long as you have a populace willing to play along. Reagan’s free lunch worked great for 30 years, until it didn’t anymore after 2007.
I’m saying 1920 wasn’t a debt bubble comparable to 1929 and today. We appeared to reach maximum capacity/serviceability in 1929 and in 2007. Like any company on the verge of bankruptcy that has burned through all their cash, it’s pretty hard to reverse once you hit the tipping point. That’s why all parties are worshiping growth today. They may get it one more time, but how high can the debt load go? What happens when throwing trillions at it doesn’t do a thing? Or bond vigilantes come knocking?
They did the right thing in 1920, but the overhang was much easier to work off than 1929 or today because the burden was much lower. They reset and recovered. We’ve avoided resetting for 30 years +.
sigli,
Are you saying 12% unemployment is better than what we have now? Because that’s what it was in 1920. The Roaring 20’s were a result of Harding’s correct economic policies. The Keynesian view of “spend till you drop” was invalid even BEFORE Keynes suggested such idiocy. The Great Depression was NOT inevitable, but rather a result of the wrong-headed policies of both Hoover and FDR.
I’m somwhat in disagreement about no deflation. I am seeing lower prices every day. Gasoline, food, lumber, you name it. It’s a spiral thats hard to stop. Yeah, the consummer might think it’s a good thing till your salary gets deflated or they cut your hours. Nothings immune. Producers get less for their goods.
In the last post in the “rates at 0” article: https://jubakpicks.com/2010/06/15/could-the-fed-keep-rates-at-0-into-2012-some-at-the-fed-think-it-should/ andante mentioned the carry trade of US and Europe.
The carry trade was really a big discussion topic at the beginng of the year as a major cause of moving the market up. (low interest rate, cheap dollar = rising market)
Does the low interest rate help or hurt the stock market now?
I also see positive, but low, inflation as what it is: good. That is exactly what you want to see in a healthy economy.
With regards to banks hoarding money: it will end soon. Banks will start moving the money almost immediately after they’ve “filled their loan loss reserve buckets”, which Jim mentions in his June 2nd article.
https://jubakpicks.com/2010/06/02/want-to-tag-along-as-the-smart-money-buys-bank-shares-here-are-three-stocks-stocks-that-fit-the-strategy/#more
When this happens, I think we’ll see CPI numbers start moving up. I also think companies will be more inclined to hire back workers once the banks are lending. People who begin receiving paychecks will start spending more freely. That spending will also add to inflation.
I also agree that real estate prices may continue to decline in many areas of the country. However, I don’t see this phenomenon as especially troubling for the economy as a whole, or the companies I own. And at a certain point, real estate will look like a better investment than government and corporate bonds. Investors will buy the real estate instead.
Ben–with government guidance, as good or bad as it may be, or with some killer growth popping up in another or a new sector of the economy. “Onshoring” seemed to be the talk of the town until Greece blew up and offset the forces pushing the trade gap down.
The economy always restructures just like housing must, but I’m sure you’re pointing towards the wide reach of real estate.
Ed, thanks for the heads up, but I don’t think 1920-21 compares as the Roaring Twenties created quite the bubbly conditions similar to today.
romingerd–the answer to your question lies in how money is created and multiplied. Good luck! It’s a long but fun journey. Google “money as debt” but try to stay away from the extreme right crazies. Mish and Mises are fine, but Mishites and Misers may mess you up.
The short answer is government hasn’t printed anywhere near enough money to counter private sector deleveraging (fractional banking in reverse) + the P+I paradox [(why we pray for 1. growth, or vote for 2. redistributive narrowing wealth gap (leftist), or 3. recessionary healing the wealth gap (rightist)].
Ed,
I agree completely that the bubble needs to pop so we can move on and I believe its going too and drag everything else with it.
My question was how can the real estate blow up and the everything else hold steady?
romingerd,
The Chinese are caught between a rock and a hard place on that one. In order to maintain their peg to the dollar, they have to keep a lot of dollars in reserve. That’s why I always wondered if the people who keep telling China to de-peg had really thought of the consequences of that idea…
EdMcGon,
Good point…maybe that is the answer. I wonder when the dollars will “come out to play” and if the Chinese may try to join the game!
lotteollie,
I was of the same opinion as you. One thing to keep in mind, it doesn’t matter how many dollars the Fed hands out, if everyone takes them and locks them away. Until they hit the economy, inflation won’t happen.
romingerd:
18 months ago I was absolutely convinced that we would he having inflation by now due to the governments actions. The only thing that I can think of that’s keeping a lid on inflation when we are running these kinds of deficits is the employment numbers, the declining real estate and the terrible rates that cash earns when sitting in a bank. This shows me I’m not as smart as I thought I was.
sigli,
Look up Warren Harding and the Depression of 1920-21. He cut taxes AND spending, lowered the national debt, and had us fully out of it by 1923. While Harding was corrupt, he at least handled the economy correctly.
BenWobbles,
You may not like my answer to this. The truth is our real estate market needs a major correction. We come out of an asset bubble and our government proceeds to re-inflate it. We could have taken our medicine in one big dose, then gotten through this. We might have even come out of it by now. Instead, we have delayed the inevitable pain, stretching it out, and we are STILL looking at a potential collapse of the real estate market, even after spending hundreds of billions to prop it up. How stupid is that?
There’s an old medical saying: Sometimes you have to cut to heal. If we are ever going to get through this, we need to cut this patient. Let the asset bubble burst, and then we can begin to truly heal our economy.
In addition, propping up financial companies that are NOT following sound risk management practices is equally insane. Let them fail, and let the surviving financial companies pick over their bones for good assets. There should NEVER be a concept as “too big to fail”.
Will there be deflation? Absolutely. Will a lot of companies go out of business? Absolutely.
On the other hand, we will also have affordable housing, instead of affordable financing for housing. Instead of finance companies getting wealthy at the expense of lower income people, and then tossing off their risk on ALL of us, the lower income people will be able to save their money and afford to buy a house eventually!
There will be some economic pain before we reach that point, but this is one case where the ends justify the means. We can truly improve this country if we are willing to make this sacrifice.
Ok, I’ll get off my soapbox now…
Please excues my economic ignorance…but does anybody know what might be causing the deflation? By my understanding deflation is a decrease in the available money supply. I know the fed has been dumping money into the economy like crady. Is it solely a decrease in consumer spending (accompanied by increased savings)? Does the bubble in the bond market have anything to do with it? Any economics 101 people out there like to explain this to me?
And what might the new doctor prescribe?
Aggregate debt decline is terribly hard to counter. The only action I’ve found to work thus far is FDR 1933, which is de facto default. Have I missed others? Can we even think of the D word these days?
Ed,
If real estate’s toast (the biggest leverage play in history x 100), how is there any way to pull through this?
Financials take another torpedo, consumer savings skyrocket, corporations continue hoarding cash, etc…..
Ed et al,
God knows we need it! Reminds me of the patient on the ER gurney…docs with paddles in hand ready to shock the poor soul back to life or submission. Change docs! (gimme one of those New York Jewish docs that graduated from a Boston or Harvard…maybe even Yale or even Tufts)
How do the CPI numbers usually get revised?
Up or down?
For What It’s Worth Dept.;
Yesterday Jim wrote that it may be time to look at China.
Liz Ann Sonders believes China is a LEI for the US.
Tim Geitner is on China to remove the Yuan/dollar peg.
All bearishness aside, I actually found the numbers a tad bit bullish. While they were less than economists expected, the fact they were still in the positive area is a good sign, as I see it. As much as we’ve been flirting with deflation, the fact we are starting to see a hint of inflation is a good thing.
The key for me will be the Fed’s money supply report this afternoon after the markets close. If the money supply increases, we might be turning a corner.
I will add one caveat: The real estate market is still toast. But if that is the ONLY market dropping, we might yet pull through this.
jobs number is really disappointing. Philly manufacturing was bad. We’re teetering on deflation