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Friday, October 12, 2012

On Inflation

On COLA

By my calculation, the COLA increase for 2013 will be 1.51%. This is an important number for anyone who gets a monthly check from Social Security, or the Federal Workers/Military retirement plans.

 

COLA is a flawed measure of inflation. The calculation has both over, and understated inflation the past few years. Recent COLA increases:

 

2009..+5.8%

2010….0.0%

2011….0.0%

2012..+3.6%

2013..+1.5%

 

The average SS recipient will see an increase in their monthly check of a whopping $21 as a result of the 2013 increase. The increased bite for Medicare will eat the raise (and more). Don’t expect a buying surge down in Boca.

 

SS has projected a COLA increase of 2% for 2013. The 1.5% actual result will produce a “savings” at SS of $4Bn. Throw in the Military and Federal workers, and it means ~$6Bn of less than “planned” spending.

 

Bernanke would look at the 2013 COLA increase and say:

“See! Inflation is too low! If inflation were higher, the government would spend more, and that would stimulate growth.

 

And Ben would be right. SS checks are a 1-1 multiplier. If the 2013 COLA increase was 4.5%, it would translate into an increase in government spending of $50Bn and an equal increase (.3%) in GDP. What’s not to love about more inflation?

++

 

Gas

 

Big spike in gas prices in Cali. A refinery blew up, the state has tough emissions laws so Californians pay the price. Bloomberg reported that the state wide average price for regular was $4.67.

 

 

So I drive off for a fill-up, chuckling at the poor bastards in Cali. I’m 30 miles north of NYC, about as far from the West Coast as you can get, what do I care what happens “out-there”? Unfortunately, the price of regular at my gas place is only 18 cents less than the “crisis” prices in the Golden  State. 

 

 

 

 

Note that the price of diesel is $4.79, This means that the cost of home heating oil for spot delivery is north of $4 a gallon. Most people around here use oil heat, and it is supposed to be cold this winter.

 

Now I’m wondering who those poor bastards are.

 

++

 

Crude

 

The WTI contract closed at 92.44. That’s not all that high. So why am I choking on $4 heating fuel and $5 gas?

 

The answer is that the crude the country uses costs much more that than the WTI futures print. This chart is the cash price for imports in Louisiana. We are paying $113 a barrel!

 

 

The Louisiana crude price would be knocked down (for a few weeks) if the President opened the spigot on the petroleum reserve. The spike in the chart over the past few months might have prompted Obama to do something with the SPR were it not for the pending election. He’s done it in the past.

It would be a hoot if he did take some “executive” action with just a few weeks to go. Nothing is off the table with this election. 

++

 

Rent

 

 

10% rent increase? That’s a big very inflation number.

 

I can confirm this (sort of). Rental costs are up, from South Florida to Boston. There is demand, properties have been moving more quickly than in the past few years.

 

“Shelter Cost” is a big chunk of Bernanke’s yardstick for inflation. I bet he is delighted to see the cost that renter’s are forced to pay is rapidly rising. This is precisely what he wants to have happen. He thinks that if rents go up it will encourage new construction, and that means debt creation and more jobs.

 

I’m not at all convinced of the virtuous cycle of growth through inflation that Bernanke is selling. This cake has to bake for another few years yet before you can tell if it’s edible.

 

One thing for sure, if you’re a renter, you’re getting screwed. You’re a pawn in a game of chess. You’re expendable. At least that is the policy of the Federal Reserve.

 ++

 

Food

 

Goldman is out with a scary story on food. (Link)

 

 

Does ZIRP, QE and TWIST have anything to do with global food prices rising?

 

I don’t know the answer to this question. I don’t think anyone has an answer. And, it is a very important question to both ask and answer. I’ll hazard a range. Anyone with some better info, please contribute.

 

* – The relationship between Uber lose Fed policy, and rising food prices is greater than zero.

 

* – The cause and effect is less than 20%. (If food is up 10%, the Fed would be responsible for less than 2.0% of the increase)

 

Is it reasonable to conclude that the Fed is responsible for about 10% of food inflation? For you Fed lovers, is 5% the right number? Remember, the answer can’t be zero.

 

This stuff doesn’t really matter at all. The Fed didn’t take food inflation into consideration when it recently set monetary policy at “Infinity”. Maybe the deep thinkers at the Fed are right to exclude food from the equations.  After all, Americans only spend 15% of their income on food. So a 10% increase is “manageable”.  People will find less expensive “substitutes”. No problem at all.

 

That story does not sell so well in other parts of the world. Goldie reports on the percentage of food cost to income for some mega population countries:

 

India – 49.7%

China – 38.0%

 

Just saying, it’s that “Global Village” thing. And substitutes are not an option.

 ++

 

Expecting

 

The market based expectations for inflation  jumped after Bernanke said his version of “For Ever”. To be honest, I was floored when Ben went Unlimited. The spike in the Tips spread said I was not the only one who was surprised.

 

That spread settled down after the “Ben’s Big Day” leap. But it has been making a comeback of late. To my tired eyes, it looks like the spread is going to take out the recent high.

 

 

Does this matter? On one hand we have a promise from the Federal Reserve to keep the return on liquid funds at zero for many years to come. And the market prices long-term inflation north of 2.5%.

 

So the implied market price of one-year forward “money” is well offered at .9750. There is a bid at .9700, but the bid is vulnerable. And this a “good” thing.

 

I don’t get it.

 

Comments

  1. So inflation is eating up a bigger portion of our paychecks, while some of us aren’t receiving pay raises.
    How to make up the difference?
    I have taken to buying things off Craigslist and then reselling them.
    No shame in that – you do what you have to do.

    (Having said that, I disdain the thought of an economy based upon buying & reselling products, rather than producing something actually of value.)

  2. $250bil on the balance sheet under “other assets”. would be shocked. shocked. shocked, if they dip in the tips market at inflection points and then recycle. just sayin.

  3. Diesel is up due to the ULSD rules, as in Ultra Low Sulfur Diesel. Processing that severe is expensive and results in more “shrink”. Diesel and heating oil now have lower sulfur than gasoline. The other problem, as you mentioned, is that most Americans pay for Brent, not WTI. Keystone would have helped with that. Instead a lot of oil is delivered by Buffet’s trains. Very inefficient. You have to send back EMPTY trains. And of course there is the monetary inflation of the Fed. Add it up and we are sinking fast.

  4. It’s really very complicated in this busy life to listen news on Television, therefore I simply use the web for that reason, and take the latest information.