Thursday, October 14, 2010



So this morning we learned that September consumer prices were up 0.4% in this non-inflationary economy. Let’s see…annualize 0.4% and you get an inflation rate of 4.9%. That doesn’t sound like no inflation to me, but I am neither a highly paid Wall Street wunderkind nor a government official poring over the latest models produced by similar innocents desperately seeking tenured positions at Ivy League universities.

There are two counters to my sullen outlook on the inflation front. One is that “core” prices (i.e., prices excluding food and energy) rose only 0.1%, no cause at all for alarm. I would point out to those who use this argument that if we exclude everything, prices are always unchanged. While I completely understand that food and energy prices are volatile, that volatility does not justify excluding them completely to get some “true” picture of “underlying” inflation. We use food and energy every day, unlike most of the components of every price index. So while using some sort of moving average to smooth the month to month price changes of food and energy might be justified, excluding them altogether makes no sense.

The other counter to those of us who see and fear inflation is that a little inflation is a good thing in this environment, an argument currently very popular at the Fed. (See my 10/06/10 piece “WE’RE IN THE MONEY, COME ON MY HONEY, LET’S SPEND IT, LEND IT, SEND IT ROLLING ALONG!” PART ?????) Given that this canard is coming back into fashion, I will only reply that I grow increasingly comfortable (ecstatic, really) with my large relative positions in gold, which, as I write this, has traded to another all time high of $1374.20, as measured by the December future, and TIPS, which have been on fire of late. However, if this current enlightened approach to monetary policy continues, I might be looking to diversify into bottled water, beef jerky, and ammunition.

1 comment:

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