Charting Inflation/Deflation

At the beginning of Q2 we introduced a Macro Theme titled “Inflation’s V-Bottom.” In the two charts below (US CPI and PPI) the V-Bottoms in year-over-year prices are outlined in red. For the month of May however we saw both the headline CPI and PPI rollover, sequentially (month-over-month), and we denote that with the little green arrows in the chart below as well.

While we don’t agree with the conflicted and compromised nature of these government calculations, we do agree that it’s important to consider these calculations relative to themselves (that is, until the government changes the calculation again!). For now, what we have learned from these compromised calculations is that there never was a “Great Depression” in consumer prices (the lowest reading was only -2.1% in July of 2009) and, at the same time, there never was a reported “Great Inflation” either (the cycle-high for inflation was just inside of +3%).

Whether the US reports it or not, over the long term, global inflation will remain a reality born out an interconnected world of Fiat Fools manipulating fiat currencies. Reinhart & Rogoff have shown this empirically in “This Time Is Different” (chart on page 181) through the breakout in the median-inflation-rate for all countries using a 5-year-moving-average for the period of 1500 (yes fifteen hundred) to 2006. The big breakout in secular global inflation really started when the US was endowed with the inalienable right to create moneys from the heavens (circa 1971).

Within the long term story of secular global inflation (which China implicitly signed off on this morning through a Yuan revaluation and Brazil did last week by giving 32 million government workers +18% wage hikes), I think the USA just proved that you’ll see headline CPI bounce, cyclically, between -3/+3 percent on its conflicted CPI calculation and producer prices (PPI) move in a range 2-3x that. All the while if he didn’t see it with $150/barrel oil, Bernanke will never see inflation. He’s a modern day Arthur Burns in that regard. It’s sad.

So what do you do with this? Other than never take the government’s word for it, I’m not entirely sure yet…

That said, on an immediate term basis (notwithstanding what’s going on with prices of things that trade in US Dollars around the rest of the world today), the sequential rollover in US headline CPI and PPI should insulate the messaging of the Fiat Fools coming out of this week’s FOMC meetings.

Bernanke’s decision to remain numb to all data that would respect a higher cost of capital than ZERO percent will likely remain Japanese in its monetary policy nature.


Keith R. McCullough
Chief Executive Officer

Charting Inflation/Deflation - US CPI


Charting Inflation/Deflation - US PPI