December 16, 2003

THE FED VS. AMERICA:

U.S. Nov. Consumer Prices Fall 0.2%; Core Falls 0.1% (Dec. 16, 2003, Bloomberg)

The U.S. consumer price index fell 0.2 percent in November, a government report showed. Excluding food and energy, prices fell 0.1 percent, the biggest drop in 21 years.

The unexpected decline in the price index, reflecting cheaper energy costs, followed no change in October, the Labor Department said in Washington. The so-called core index, which excludes food and energy prices because they tend to be volatile, fell 0.1 percent, the biggest decline since 0.2 percent in November 1982.

Surplus industrial capacity, gains in worker productivity, and global competition have held prices in check even after the U.S. economy grew in the third quarter at the fastest pace in 20 years, making it easier for customers of General Motors Corp., Procter & Gamble Co. and other companies to find bargains. Federal Reserve policy makers last week indicated that they see little immediate threat of inflation.

A figure below expectations "would be a reminder that even with the pickup in growth there's no pricing power," said Ethan Harris, chief U.S. economist at Lehman Brothers Inc. in New York, before the report. "We need to see a sustained healing in the economy before we can talk about inflation, and we're only at the very beginning of that now."

Economists had expected a 0.1 percent increase in the consumer price index, based on the median of 64 forecasts in a Bloomberg News survey. Estimates ranged from a decline of 0.1 percent to a rise of 0.4 percent. Core prices were also forecast to rise 0.1 percent.

Consumer prices for all goods and services rose 1.8 percent for the 12 months that ended last month, compared with a 2 percent increase October. Core prices rose 1.1 percent from a year earlier, the smallest gain since January 1966.


Add in the fact that even Alan Greenspan has testified that the inflation rate is overstated by at least 1%, because of problems with the way it's measured, and you have an economic environment with not just no inflation but no chance of any. You just can't raise your prices in the globalized economy because others won't follow suit. Yet the Fed continues to keep interests rates artificially elevated and is making noises about raising them in the not too distant future. Didn't they do enough damage when they caused the economic slowdown of 2000-01?

Posted by Orrin Judd at December 16, 2003 9:33 AM
Comments

Something strange is happening: inflation (as the article states) is low to non-existent, the expansion is almost historic (as is the stimulus), the dollar continues to weaken, both retail and wholesale customers have more choices than ever before, wage pressure is not there (for obvious reasons), and yet commodity prices have climbed steadily or stayed high for the past 2 years or more (metals, oil, natural gas, lumber, coffee, beef, etc.).

Either the commodity prices are going to start dropping, or the switch from flatline to inflation will occur much more quickly than anyone anticipates, or we are in some sort of new paradigm, and no one knows squat.

I have seen some articles attribute the high price of gold to the fear of terrorism, but there was a lot more fear in 1968, 1973, 1979-80, and 1990 than there seems to be now. Thoughts?

Posted by: jim hamlen at December 16, 2003 11:52 AM

jim:

Other than Europe and Japan keeping their interest rates too high also, isn't the most likely explanation psychological? People are buying gold and driving down the dollar because their ideology tells them that war has to weaken us and that they have to have a bright future. If a 9-11 happened in Berlin or Paris, what would the euro be at the next day?

Posted by: oj at December 16, 2003 12:05 PM

People need to be more aware of Kondratieff price wave theory. We're in a deflationary moment and probably will be for another 10 years.

Posted by: Chris Durnell at December 16, 2003 3:59 PM

Good question - I suspect that all the EU leaders would be on the next plane to Washington, asking for help.

Or they would be on the next plane to Riyadh (Karachi, Ramallah, Damascus, Tehran, etc.), asking for forgiveness.

Of course, the English, the Poles, the Spainards, and the Portuguese would play it differently.

But how much lower do interest rates need to be? The argument could be made that at the current level of 1%, the cost of borrowing is so low as to hurt manufacturing by 'cheapening' any interest charges for consumers who buy on credit.

And when the time comes to adjust, will Greenspan just tighten the supply (M2) for a few months rather then raise rates gradually?

Posted by: jim hamlen at December 16, 2003 4:38 PM
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