CPI About To Go Negative? Not So Fast
Mike (Mish) Shedlock | Jan 29, 2015 05:48AM ET
When inflation alarmists want to convince everyone the dollar is about to become worthless, they post this chart of the CPI:
CPI - Urban Consumers - All Items - Index
Inflationists claim that is a trend to oblivion. And actually it is. But it's a slow trend towards oblivion with intermittent disruptions as the following chart shows:
CPI - Urban Consumers - All Items - Percent Change From Year Ago
As measured by consumer prices, inflation went negative from December 2008 until October 2009.
CPI - Urban Consumers - All Items - Percent Change Detail
The CPI hit a record low of -1.959 in July of 2009.
My prediction—made in 2005 or so—was and still is, "The US would go in a and out of deflation a number of times over a long period of time".
I was speaking in terms of "credit deflation", but that occurred as well. Either way, I was correct and the inflationists who predicted hyperinflation before deflation were simply dead wrong.
h3 Oil vs. CPI/h3
I got to thinking about this again recently given the plunge in oil. Let's take a look at oil prices in relation to the overall CPI.
Clearly there is a correlation over longer periods of time but the amplitude of oil in both directions is much greater. That makes sense because housing is the largest component of the CPI, not energy.
Get The News You Want
An article on Yahoo Finance on January 16 caught my eye and I bookmarked it: A Look At Hyperinflation , I stated:
"Center cut pork chops not on sale are $5.49 lb. Phooey. Who needs that? At least once a month they are on sale for $2.29 lb or less. Seriously, we are talking 1970's prices [on chicken]. I know because I worked as assistant manager in a grocery store back then. Heck I have no idea how they can even raise chickens at .49 lb. If you know then please tell me!"
Chickens were a loss leader at $0.21 a pound in 1970. They were $0.49 when I wrote that.
With regard to pork chops, I have made similar claims in 2007, 2008, and 2011. And here we are again, back at $2.49. But what about beef?
Live Cattle
Beef prices are high because cattle prices are high. But, for the first time since the beginning of 2013, prices are down two consecutive months, and there is plenty of room to drop.
Why are pork chops back to $2.49 again?
Lean Hogs
Here we are once again. From 2011 until the beginning of 2014, center cut pork chops sale prices were higher, in the range of $2.79 to $3.29 a pound. Welcome back $2.49. We missed you. Not on sale? Don't buy them, or buy them sparingly.
Wheat
Wheat is back to where it was in late 2006.
Soybeans
Soybeans are back to where they were in late 2007. There's considerable room for prices to drop to 2006 levels like the other food commodities.
Advice
Buy a freezer and use it! It is crazy to pay $5.49 for chops when you can get them for $2.49. It is equally crazy to pay $10.99 for prime rib when you can get it for $7.99. Butter, bacon, and cheese all freeze well. Cheese is often half-price, so is bacon. If you are a vegetarian you have a harder time, but I hazard a guess a freezer or pantry can still come in very handy. Learn to shop!
Where To From Here?
No one can say, but it is pretty clear that food commodity prices are falling and food prices should drop with a lag.
If rent prices drop as well (I do not expect that, but it easily could happen), then the CPI could turn negative once again, even if oil prices head back up.
HPI-CPI
My preferred consumer price measure is HPI-CPI a self-designed index that includes actual home prices instead of rent. By that measure, we will be soon back in price deflation if housing prices drop, and I believe we are on the cusp of another housing decline.
I last wrote about HPI-CPI on September 24, 2014 in Housing Prices, "Real" Interest Rates, and the "Real" CPI
Here's the chart. See the article for discussion.
h3 Credit Deflation?/h3
The important thing is credit deflation, not the myopic central bank focus on consumer prices. I do expect credit deflation and a tightening of lending standards once elevated asset prices plunge.
The plunge in US Treasury yields in the face of expected Fed hikes lends credence for the above analysis.
One more point: Please don't tell me about shadowstats CPI. It's a thoroughly discredited model.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.