Questioning "Core Inflation"

Mark Gongloff and Scott Patterson in the Wall Street Journal proclaim, "Many economists and Federal Reserve officials like to dismiss energy and food prices when reading inflation statistics because the two sectors are volatile. But it is time to dismiss that practice." The inflation you and I suffer from when we pay higher prices is called "headline inflation." Economists hope to find the underlying trend by eliminating the prices that jump around the most. To achieve that goal they subtract food prices and energy prices from the consumer price index and another more comprehensive index called the personal consumption price deflator. When inflation is measured by these bowdlerized indices, it is labeled "core inflation."

The problem with core inflation is that it excludes prices that are sometimes leading indicators of future inflation.

The Weak Dollar is Driving Higher Exports

The Fed lends $200 Million

The Economists and the Pundits Are Starting to Agree that We are in a Recession

The front page of the Wichita Eagle tells us this morning that "Job losses point to recession," while the Wall Street Journal's lead story agrees: "Jobs Data Suggests U.S. In Recession."
Yesterday's employment report showed the third straight decline (after revisions) in payroll employment.

I have been saying for some time that the U.S. economy has been in recession since last spring or summer. That is what I told the Wichita Eagle two months ago and have been saying in this blog. The data is starting to catch up with my analysis.


The rest of the profession is starting to come around. On January 27th, Lawrence Summers wrote in the Financial Times: "Markets and perceptions of the economic outlook change rapidly. Even two months ago most observers doubted predictions of a US recession, saw no need for a fiscal stimulus, and thought that inflation fears should constrain monetary policy. Now, ...[t]he debate about recession is ... about how deep and global its impact will be."

The one item good news emerged from yesterday's report: the unemployment rate fell for the second straight month. However it is subject to Harris's Second Law of Recession Watching: "every silver lining has a dark cloud over it when it comes to emerging news during a downturn. " The driver of this decline was a fall in the number looking for work, hardly evidence of reviving economic growth.

Wall Street follows the payroll employment data to the exclusion of the household survey which estimates the unemployment rate. The household survey data are very noisy and the government's benchmarking makes tracking it consistently over time difficult. This is a serious drawback since consistent time series are the lifeblood of business cycle analysis.

That said, the employment ratio provides a decent indicator of recessions with a slight lead. The message is remarkably clear: we are in one.

Froma Harrop on the Subprime Mortgage Fiasco

Froma Harrop is right: Henry Potter was, at least, an up front, mean rotten banker: "Nowadays, it's impossible to watch the 1946 holiday movie 'It's a Wonderful Life' and not feel a twinge of respect for Henry F. Potter, the villainous banker played by Lionel Barrymore. Potter was not above drawing the last drop of blood, but at least borrowers knew whom to hate. And if they were late paying, they knew where to crawl."


Froma Harrop nails the problem when she describes the true culprits of our mortgage market meltdown: the brokers who make the big commissions and leave others to pick up the pieces. Good old fashion bankers had to live with their creditors and had a real interest in their making it.

Harrop also names that unindicted co-conspirator too, Alan Greenspan himself: "Former Fed Chairman Alan Greenspan had cheered on the housing bubble that raised home prices to ridiculous levels. And despite the warnings, he ignored the recklessness and downright cons that would inevitably push mortgage market into crisis."

Central Banks: Divergent Responses

The Financial Times tells us that this will be a busy week. The purchasing managers survey (aka ISM) will come out Monday and employment on Friday. Inflation reports are due out in the Eurozone and Great Britain. The ECB is likely to raise rates to 4% while the Bank of England is likely to hold them steady at 5.25%. On Tuesday, the Reserve Bank of Australia "could increase interest rates from 7 to 7.5 per cent, while Canada is expected to cut rates by 25 basis points to 3.75 per cent."

When Will They Ever Learn?

Leisure Suits and the Fashionable Dollar

As I marvel at our disastrous monetary policy, I keep hearing in my head Pete Seeger's haunting refrain "When will they ever learn? When will they evvvver learn?" it is from his poignant anti-war song, "Where have All the Flowers Gone?" made popular in this country by the Kingston Trio. It's their version I am hearing in my head right now. I also have a fond spot for Marlene Dietrich's rendition of the German translation ("Sag mir, wo die Blumen sind") by Max Copet.

"When will they ever learn?" That is Alan Metzler's question in his commentary in yesterday's Wall Street Journal. He wonders if we are returning to the monetary disasters that brought us the rising cycles of inflation and unemployment during the 1970s. The economic folly of that decade evidenced as much wisdom as its fashions: fads like bell bottoms, leisure suits (modeled above), and granny dresses. Professor Metzler reminds us that "An independent central bank is supposed to maintain the value of the currency and prevent inflation. In the 1970s and again now, Federal Reserve officials repeatedly promised themselves and each other that they would lower inflation. But as soon as the unemployment rate ticked up a bit, the promises were forgotten"

How well has our independent Fed done? Inflation is back up t 4.3 percent. The Euro hit $1.51, Oil is trading at $102 a barrel, and Gold is over $900 an oz. The "mighty greenback" is in about as much demand as those polyester leisure suits.

In tomorrow's Journal, the editors take Fed Chairman Ban Bernanke directly to task: "First, Fed Vice Chairman Don Kohn declared that, while inflation was worrisome, the Fed now views recession as the more urgent danger to fight. Then on Wednesday, Fed Chairman Ben Bernanke told Congress that the Fed will do whatever it takes to stop the credit squeeze from becoming a recession. That's about as close as a central banker will get to saying that he's thrown price stability to the wind. If inflation rises -- as it now surely will -- then the Fed will worry about that later, after the economy is safely past the credit crunch."

The Fed can flood the banking system with reserves, but it can not replace bankers' capital once those gray flannel mavens have lost it.

When WILL they ever learn?

Aussie Bonds Look Good: The Reserve Bank Has Guts

Bill Gross manages big money: $120 billion in bonds. He does this on behalf of California-based Pacific Investment Management Co. (PIMCO.) PIMCO's bond fund is the world's largest.

Guess what he likes: Aussie bonds.


According to a report on Bloomberg this morning, "'The Reserve Bank of Australia should be commended for [its] inflation targeting,'' Gross said. 'Australia has some of the most attractive real interest rates in the world.'' In other words, the Reserve Bank of Australia takes seriously its job of maintaining the value of the Australian dollar. The Australian central bank pursues a policy of keeping inflation between two and three percent a year.

Bloomberg News, based on a near unanimous poll of economists, predicts "Australia's central bank Governor Glenn Stevens will raise the benchmark interest rate by a quarter-percentage point to 7.25 percent at the next policy meeting on March 4."

Chrysler Pulls out of the Clone Wars

Joseph B. White writes in today's Wall Street Journal that Detroit is rethinking the wisdom of selling three or four versions of the same car under three different brands. Why? "[I]n a market with more than 300 different models -- depending on how you count -- fielding two or three or even four of the same basic car can lead to some very thin slices of pie, especially when increasingly well-informed shoppers can figure out in two or three mouse clicks that a Saturn Outlook and a Buick Enclave and a GMC Acadia are just three different styling takes on the same large crossover wagon."

White continues, "Chrysler's senior management recently declared that it wants out of the clone game. The company, which has the advantage of being closely held and thus not as concerned about what outsiders think, has outlined plans to kill a flock of its slow-selling clones, and focus its efforts on selling more of each model that remains."

After all, "Customers don't care whether they buy a minivan from a Dodge dealer or the Chrysler dealer just down the street. They just want a good minivan. In these difficult times, Chrysler can't really afford the capital and marketing effort to promote two functionally similar versions of a three-row box on wheels."

Read "Send Out the clones."
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