July 14, 2005

...AND LOWER...:

Consumer inflation absent again in June (MARTIN CRUTSINGER, 7/14/05, Associated Press)

Inflation pressures on the consumer were absent for a second straight month in June, reflecting another drop in energy costs, the government reported Thursday.

The Labor Department said that its Consumer Price Index was unchanged in June after having posted a 0.1 percent decline in May. [...]

Outside of food and energy, inflation was well contained in June, rising a slight 0.1 percent, the same increase as in May.

Meanwhile, retail sales jumped by 1.7 percent in June, nearly double what analysts had been expecting, as the return of attractive auto incentives and warmer weather sent consumers streaming into auto showrooms and shopping malls.

Daily Forex Commentary (Jack Crooks, 7/14/05, Asia Times)

There seems to be this belief that higher energy costs are inflationary. However, we see it as deflationary. Simply stated: consumers choose to put gas in their cars, the money they spend goes to producers of energy - therefore, Mr Consumer has less to spend on other items. We think higher energy costs become inflationary when non-energy producers are able to pass on the additional costs of production. And despite some budding optimism that manufacturers are gaining pricing power traction - it is hard to believe. Real wage growth isn't there for consumers. And there's a place called China, and another named India, that continue to pressure final goods and services prices lower globally for as far as the eye can see. We note this tidbit of news from The Standard:

"China's private-sector companies will probably trim investment because earnings aren't growing as fast as the economy," said JP Morgan Chase economist Frank Gong. Private sector companies account for an estimated 60% of economic production in China.

Hmmm ... And this is the interesting part:

"There have been a lot of upstream price increases [imported raw material] that haven't been trickling down to consumers because downstream [Chinese] companies don't have pricing power," said Mr Gong.

If Chinese companies don't have pricing power given their relatively low cost of production, why should we assume US companies are gaining price-power traction? [...]

Maybe we get a surprise on inflation this month - and maybe the dollar rallies - or maybe it doesn't. We seem to be in one of those zones whereby even if you guess the number right, you could be very wrong on the market reaction. But, given the US economy will probably be the last bastion of some growth relative to its competitors, should creeping global deflationary pressure rise, as we suspect, the dollar would seem to be the beneficiary over time.


Posted by Orrin Judd at July 14, 2005 6:52 AM

[T]he return of attractive auto incentives and warmer weather sent consumers streaming into auto showrooms...

That's putting it mildly.

20% off ?

When have we ever seen that before, except on models/colors that they can't give away ?

On the manufacturers' side, if one is on shaky financial footing, does it make any sense to ensure that most vehicles will be sold at a loss, and then increase sales by 50% ?
Especially since many of those sales are guaranteed to have been cannibalized from future sales.

Posted by: Michael Herdegen at July 14, 2005 11:20 AM

Is there a worse financial decision than buying a new car?

Posted by: b at July 14, 2005 11:51 AM


They aren't car companies--they're finance companies.

Posted by: oj at July 14, 2005 12:04 PM

Buying a new motorcycle.

Posted by: joe shropshire at July 14, 2005 12:20 PM

Joe: ouch.

OJ: They're healthcare administrators that do vehicle finance and a bit of manufacturing on the side.

Posted by: John Resnick at July 14, 2005 12:46 PM


That might make sense if the auto manufacturers financed all of their vehicle sales, or at least broke even on those vehicles they don't finance.

With the employee discount incentives, they're only making upfront money on their luxury and near-luxury lines.

Posted by: Michael Herdegen at July 14, 2005 1:36 PM

They may lose money on every sale, but they make it up in volume.

Posted by: Gideon at July 14, 2005 1:55 PM

The entire axis of economic thinking would shift if some one just kept repeating this simple truth.

Inflation is too many dollars (Euro, etc.) chasing too few goods (& services). The printing presses have been turned up on high, but the world's capacity to produce & consume goods & services has been turned up higher, hence...


The idea that "price increases" mean "inflation" is simply false (or back words at best).

Economics in one lesson..maybe two.

Posted by: BB at July 14, 2005 6:21 PM

Here's a headline in our paper:

"Oil prices slipping."

You can't fault their semantic skills.

Posted by: erp at July 14, 2005 6:57 PM


A good insight, but IIRC, the U.S. Treasury has been restricting the growth in the money supply for over a year now, so there actually are fewer dollars in circulation than there were in '03.

Also, it's ALWAYS easier to inflate the money supply, rather than production capacity.

All we have to do is toss a zero onto every bill...

Posted by: Michael Herdegen at July 14, 2005 8:38 PM

The government has very little control of the effective money supply, and doesn't even have a particularly precise measurement.

Posted by: David Cohen at July 14, 2005 10:55 PM
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