Inflation is a thorny topic for those who try to write about it. Everyone has a different gripe, and they are all right. The numbers bandied around from CPI to Core and non-core and whether crazy things like hedontics (that IPad thing) should be even considered in the equation make mush of any discussion. No one really trusts the numbers. Not even Fed officials. (TV anchors do, however)
The next issue is that everyone lies about the numbers. From Bernanke to, well, me. The numbers are easily skewed to make whatever case you want.
I can’t help that the measuring sticks that we use are flawed. To my knowledge there is no better set of numbers to use. So I will use COLA as a benchmark to make a few points. A look at America’s long-term track record on inflation:
The most notable part of this graph is the tremendous blowup that we had with inflation in 2008-2009. We raced higher, then it collapsed. A closer look at monthly changes in COLA since 2007.
Some observations about this very unusual period in history.
-From July of 2008 through February 2011 inflation rose by just ½ of one percent (about ¼% per annum). If you want QE to go on for another few years you will point to this as the evidence that inflation is “worrisomely” low. This is what Bernanke is looking at. There is no inflation at all over this time period.
-I’m not sure of the economic relevance, but I do think it is worth noting that as of February 2011 inflation has fully recovered from the 08-09 recession. We will be making new all time highs for the next six months at least.
-The peak to trough drop in inflation came from July to December of 2008. What we call inflation fell by a real 5% (11% annual). You wonder why guys like Bernanke and Paulson were freaking out? This is the number that scared them the most. In the fourth quarter of 2008 inflation fell at an annual rate of 19%. That’s pant-shitting time. This is the panic that brought us TARP and QE and all that other stuff they did back then.
-From the trough the COLA measure of inflation has risen from 204.8 to 217.4 today. Over this 26 month period we have seen a real rise of 5.8%. (2.3% annual). This number is quite a bit hotter than Bernanke’s test for inflation of, “a little under 2% per annum”.
-In the past nine months CPI-W has risen by an annual 2.2%.
-In the past six months CPI-W has risen by an annual 2.9%.
In the past two months the CPI-W has risen by an annual 5.1%
It is these last three data points that has put inflation back on the front page. Not only are we experiencing measurable inflation on a daily basis, we are also seeing the change in pricing accelerate on a very rapid basis.
-A point not from the chart. The CPI-W will make significant gains for April, May and June. That inflation is now baked in the cake. Bernanke knows that quite well.
This chart shows historical annual COLA increases. This data smoothes out all of those monthly gyrations.
There are only two years where this measure of inflation exceeds 5%. We know what happened in 2008; that was ugly. In 1991 we had a mild recession (7.8% unemployment, peak to trough GDP –1.4%, duration 9 months). This recession was brought on by a blowup in the oil market. We were headed off to Gulf War #1.
In 2001 we had another mild recession (8 months). That one was caused by the Dot.com blow out. CPI-W was on the high side at 3.5% that year. But the stock market was racing at 20% per annum. Easy money caused that speculative boom. Everyone paid a price.
After a tremendous hiccup inflation is today at an all time high. CPI-W has grown rapidly over the past half year. It is growing very rapidly (dangerously?) so far in 2011. It is near certain that the rate of inflation over the next few months will be significantly above trend. Historically, periods of rapid (5+%) inflation are met with periods of recession. The related conditions that bring economic crisis are excessive monetary policy, war and or an energy shock.
All four of these conditions are met today. In other words, we are asking for trouble. How Mr. Bernanke can avoid seeing how all these stars are lining up is a mystery to me.
My oil contract ran out. I got a 1,000 gallons spot delivery at $4.40/gal. The spot price a year ago? $3.17. That comes to a tidy 36% increase. In that corner of my expenses I’m experiencing hyperinflation. Bernanke can exclude food and energy from his calculations at his and our collective peril.