Fed Officials Should Get Out and Shop: Caroline Baum (Update1)
quote.bloomberg.com
April 14 (Bloomberg) -- In the rarified atmosphere at 20th and C Streets, better known as the Federal Reserve Board, there is no inflation.
In the parallel universe in which most of us live, prices are going up for gasoline, used automobiles, coffee, plywood and paper products. Kleenex tissues, Bounty towels and Dixie cups are among the common household products that consumers will pay at least 5 percent more for by mid-year.
New York City residents and visiting tourists can look forward to a 26 percent fare increase for a yellow cab ride -- even as they look away from the lousy service (no quality adjustment for the degradation of services in the consumer price index).
Basic cable television rates have gone up. Soaring steel prices are expected to filter through to the prices consumers pay for office furniture, home appliances and new automobiles. The surge in soybean prices is showing up in the higher price tag for vegetable oils. Milk prices are going up 50 cents a gallon.
Used vehicle prices, as measured by the Manheim Used Vehicle Value Index, rose 1.7 percent in March, the biggest one-month increase in almost six years. The index is up 4 percent in the past 12 months.
Scorpio Rising
``It isn't just gas stations that are raising prices,'' says Bill Dunkelberg, chief economist of the National Federation of Independent Business in Washington. ``The price hikes are pervasive and led by the service sector, which is not energy dependent.''
In finance, insurance and real estate, ``0 percent cut prices and 43 percent raised them'' last month, Dunkelberg says. The March NFIB survey reflects ``the most aggressive price behavior seen since early in 2000,'' with a net 19 percent of all firms reporting an increase in average selling prices.
The latest price readings from the NFIB survey support the steep rise reported by national and regional purchasing managers in their indexes of prices received as well as prices paid. But they were pretty much dismissed as anecdotal or evidence of relative price changes because they hadn't registered as generalized inflation -- until today.
The Bureau of Labor Statistics reported a 0.5 percent increase in the CPI and a 0.4 percent increase in the core index, which excludes food and energy. While these jumps clearly exaggerate the monthly trend, the core index -- up 0.2 percent in both January and February -- was already rising at twice last year's trend.
See No Disinflation
Inflation is defined as a rise in the price level --although more and more the official price indexes are shifting toward cost- of-living measures, adjusting the weighting of goods and services based on consumer preferences. That's fine, but let's not call it an inflation index.
Consumers aren't nearly as sanguine about the inflation outlook as Fed officials. In the March University of Michigan Survey of Consumers, inflation expectations for the coming year rose to 3.4 percent from 2.9 percent in February (the average) and to 2.9 percent from 2.6 percent (the median). Large month-to- month swings were common in the 1970s and 1980s but are something of an anomaly today, according to Richard Curtin, director of the Michigan Survey.
``It has to do with gas prices,'' Curtin says. ``And it didn't push up long-term inflation expectations, which have been at 2.8 to 2.9 percent for the past year,'' using the median estimate for inflation five years out.
Reality Check
Gas prices may be affecting inflation expectations, but the response by consumers is much different than it was a year ago, says Susan Sterne, president of Economic Analysis Associates in Greenwich, Connecticut. This time they're paying them.
``The percentage of consumers who say it's a bad time to buy a car because of high gas prices hasn't gone up,'' Sterne says. (It was a meager 4 percent in March, according to Curtin.) ``The auto companies aren't seeing any response either,'' she says.
A combination of lower taxes, tax refunds and accelerating wage growth are fortifying the consumer, Sterne says.
Assuming inflation expectations have something to do with consumers' actual, real-world experience, it's curious that the disinflationary trend in the CPI has gone largely unnoticed by those who purchase goods and services on a daily basis.
The CPI rose 1.7 percent in the year ended March while the core index was up 1.6 percent, up from a four-decade low of 1.1 percent in January.
Hedonic Hooey
``When there's a consistent deviation over time between what consumers say and what shows up in the price indexes, you have to ask yourself why,'' says Doug Lee, president of Economics from Washington in Potomac, Maryland. ``Consumers' estimates have been running a percentage point higher than the CPI.''
Lee says the divergence has to do with the way the government constructs the CPI.
``There's a lot of hedonic adjustment that consumers don't do in their heads,'' Lee says.
Hedonic models allow the BLS to calculate the value of quality change. (A higher price for a more powerful computer, for example, is considered a quality adjustment and not a price increase.)
Behavior Modification
Consumers develop an impression about inflation based on what they see around them. They ``have a sense of what's going on in the real estate market, even though they aren't buying or selling a home,'' Lee says. ``Consumers behave based on their idea of what's going on, not on the basis of artificial statistics the government produces.''
Lee isn't criticizing the BLS's methodology. He's just questioning whether the price measures, with a large share determined by an imputed rental value of a home, are ``telling us what they should tell us. They don't seem to correspond to what people sense is going on in the world.''
Consumer, and business, behavior matters to the Federal Reserve. St. Louis Fed President Bill Poole, long considered an inflation hawk, stressed ``the importance of inflationary expectations as a determinant of inflation in a speech at the University of Arkansas in Little Rock last week. What matters to the inflation process is ``how the public and financial market participants expect inflation to evolve,'' Poole said, arguing for ``well designed and articulated policy.''
Stocking Up
Financial market participants' expect inflation to evolve higher, judging by the difference between nominal and inflation indexed bonds. The break-even rate, or expected inflation, on 10- year notes rose to 2.54 percent following the CPI report, the highest since October 1997, shortly after the new class of security was introduced.
Poole might be interested to know some consumers are starting to behave as if higher prices are more than a passing fancy. Yesterday's retail sales report for March showed a record 10.6 percent jump in sales at building-material stores and garden equipment and supplies dealers. The 27.4 percent year-over-year increase was so huge it prompted the ever-curious Joe Carson, head of global economic research at Alliance Capital Management, to do some digging.
Carson learned from Census Bureau statisticians that some farmers have been pre-paying for their annual supply of fertilizer, getting a discount up front and immunizing themselves against price increases down the line. Some fertilizers are up 25 percent in price in the past year.
``Clearly the increase overstates the trend in sales,'' Carson says. ``But it says something about inflation expectations.'' |
