November 25, 2010
Core at Zero
At least, month-on-month. Three month annualized inflation -- either PCE or CPI -- both under 0.5%:
Figure 1: Month on month annualized core personal consumption expenditure deflator (blue), and core CPI (red), seasonally adjusted. Source: St. Louis Fed FREDII.
Figure 2: Three month annualized core personal consumption expenditure deflator (blue), and core CPI (red), seasonally adjusted. Source: St. Louis Fed FREDII.
Update, 12:20pm Pacific, 11/26: Here is the "food at home" component of the CPI, which represents in part the grocery store aspect of the cost of living.
Figure 3: Month-on month annualized (blue), three month annualized (red), and 12-month inflation (green) of the "food at home" component of the CPI, seasonally adjusted. Source: BLS.
The m/m rate is 0.4%, the three month rate is 0.7% (both annualized), and the 12 month rate is 1.1%. The two year rate is -0.7% (annualized). This graph impels me to ask -- is this a "significant" price increase over the past year or so?
For the entire "food and beverages" component, see this post.
Update, 7:45pm 12/2/2010: Donald Marron documents that inflation is very low even after stripping out of the CPI the cost of shelter.
Posted by Menzie Chinn at November 25, 2010 11:34 PMdigg this | reddit
so what ?
both PCE or CPI headline and Core are still rising ??
the inflation expectation remain well anchored and maybe moving higher ?
FED official mandate is not inflation targeting, certainly not CORE CPI or PCE targeting?
even those inflation targeting central bank like BOE, ECB, they dont target core?
Posted by: isaac at November 26, 2010 01:18 AM
how about without the housing component?
Posted by: rjs at November 26, 2010 03:52 AM
Remembering that: "principal reliance is placed on the data compiled by government statisticians. They are subject therefore to the limitations of all analyses based upon broad statistical aggregates, namely, data cannot be compiled accurately or in a manner which conforms to rigid theoretical concepts, and the entire approach tends to be ex-post & static".
Posted by: Anonymous at November 26, 2010 06:01 AM
It gets worse. The Cleveland Fed shows median CPI only rose at a 1.1% annual rate and the trimmed-mean CPI only rose at a 0.6% annual rate.
Apparently some folks here think that disinflation hovering perilously close to zero is a good thing. Ugh!
Posted by: 2slugbaits at November 26, 2010 07:02 AM
Don't forget that the y/y change in nonfarm business unit labor cost is -1.9%. Moreover the upward revision of last quarters real GDP growth implies that productivity growth will be revised up and unit labor cost will be revised down to below -2.0%.
Posted by: spencer at November 26, 2010 08:45 AM
Interesting subjects the forecasting of inflation, inclusive of Price consumer index ( PCE) and price consumer inflation (PCI).
First compress to neglect the most volatile components,food and energy ,integrate the trade off between employment and inflation (Philips curve) and deal with a model remaining vulnerable and in that order, to a change of monetary policy,to the exchange rates.Factoring the wider possible range of inflation for directional change,comparing the Philips curve model and the naive model stating inflation of the last 12 months is equal to the inflation of the last 12 months,has enabled S FIsher,Chin Te Liu,Ruilin Zhu (When can we forecast inflation?) Table 1 to give advantage to the Philips curve over the naive model.
The bank of England seems to be keen of the same model of inflation targeting,and yet the random effects of its monetary policy much more apparent.
To be recorded gasoline price is inclusive in the inflation benchmark.
Bank of England Governor Mervyn King said inflation will remain “elevated” throughout 2011 after it unexpectedly accelerated in October, forcing him to write the fourth letter of explanation to the Treasury this year.
(Reference Inflation targeting the UK experience, J Vickers Bank of England)
Apparently there are no models providing for any comfort when it comes to forecasting inflation.
Posted by: ppcm at November 26, 2010 08:57 AM
isaac: I might be mistaken, but my reading of the discussion pre-crisis is that the the Fed's unofficial comfort range has been 1.5 to 2 percentage points, PCE core.
Anonymous: I'm not sure what we are to take from a quote from an anonymous source (well, actually flow5 also likes quoting this passage, but I still don't know where it comes from). Would you be more confident in the measured inflation if it came from anonymous private sources, or random person on the street? Perhaps it would be more useful for you to highlight specific attributes of either series you think lead to incorrect inferences.
Posted by: Menzie Chinn at November 26, 2010 09:06 AM
Assuming a world where there is no inflation, who is hurt? Debtors? Does it go beyond this? Does employment suffer? Do contracts written without inflation adjustments suffer? I am not asking rhetorical questions, I am trying to follow the money on who wins with inflation at the Fed's comfort zone and all I see is the obvious answer: debtors win at the expense of creditors. And business writes at the most one-year contracts or contracts with automatic inflation adjustments. But if I'm missing something please advise. (And I understand that when the east? wind prevailed the BoE knew that it needed to increase the amount of money, or was it credit, available...)
And, if I may, what does your moniker mean?
Posted by: Rob at November 26, 2010 09:20 AM
Rob Let's begin by noting that the effects of inflation and deflation are not symmetric, so a 1% rate of deflation is a lot worse than a 1% rate of inflation. So if the Fed is going to err, it's best if it errs on the side of inflation. Next let's note that what makes inflation insidious isn't a rise in the price level per se, but rather unanticipated rises in the price level. If inflation is very predictable at (say) 3 percent per year, then it can be anticipated either adaptively or forward looking. The reason we are more concerned about a 10 percent inflation rate than we are a 3 percent inflation rate isn't because 10 is bigger than 3. The reason we worry about a 10 percent inflation rate is that it is likely to be unstable and quickly become a 15 percent inflation rate. It's not inflation that we worry about, it's accelerating inflation that concerns us. The Fed worries about the second derivative. And this really leads to the third point, which is that deflation tends to manifest itself in reduced output levels rather than further reductions in the price level. Deflation even at low levels is also inherently unstable in a way that low levels of positive inflation simply are not. And that's really why the Fed wants to have an inflation cushion. There are measurement errors. There are exogenous shocks to the economy. There are all kinds of things that can result in the Fed missing its inflation target, so they want to build in a safety level that cushions against falling into deflation. If the Fed targeted to a zero inflation rate, then they would occassionally undershoot the target, and that would be unstable.
As to the moniker...long story.
Posted by: 2slugbaits at November 26, 2010 10:26 AM
Back when headline PCE fell 2.1% between July and December 2008 (5.1% at an annual rate) the "inflationistas" (at least the ones that don't think the inflation indicies are a government conspiracy) were screaming "forget headline inflation, it's core inflation that really matters". My what a difference two years makes!
All that deflation is now conveniently down the memory hole. It took until December 2009 before headline PCE exceeded July 2008 (17 months). As of October it was 1.0% higher for an annual rate of (gasp!) 0.4%. Over the same period core PCE is up 1.2% at an annual rate.
That's the whole reason we look at core inflation. It's less volatile.
But I'm not concerned about the missguided ravings of a bunch of hyperinflation fearing knuckleheads. I'm much more concerned about the poor prediction record of the major modelers. The Survey of Professional Forecasters (which includes such extremist organizations a Moody's economy.com, Macroeconomic Advisers, IHS/Global Insight, Goldman Sachs etc.) has consistently overforecasted core PCE one year out since the recession began. In 2009Q1, 2009Q2 and 2009Q3 they forecasted core PCE would rise 1.4%, 1.4% and 1.3% respectively in 2010Q1, 2010Q2, 2010Q3. The actual record was 1.2%, 1.0% and 0.8% respectively.
Now, presumably the major modelers take into account facts such as unit labor costs plunged 4.6% between 2008Q4 and 2010Q1 and have been essentially flat since. But yet they have been consistently overestimating core inflation. And when such mainstream sources are consistently overestimating future inflation what does that tell you about the predictions of the inflationistas (and their beliefs concerning the ratex Phillips Curve)?
P.S. The SPF is currently forecasting that core PCE will rise at an annual rate of 1.3% in 2011Q4 (despite the fact they also are forecasting unemployment will be 9.0%). Don't you believe it!
Posted by: Mark A. Sadowski at November 26, 2010 10:26 AM
"I am trying to follow the money on who wins with inflation at the Fed's comfort zone and all I see is the obvious answer"
yeah...debtors have been winning for decades in the usa. the signs of prosperity are everywhere.
Posted by: yuan at November 26, 2010 10:54 AM
This is the led Dr Bernanke Federal Reserve,Thanks giving day for the various Davis cup players.
Without his guidance,they may have been required to spin their accounts further.
Posted by: ppcm at November 26, 2010 11:34 AM
Rob, 2slugbaits: Low and stable inflation 'anchors' time preference to slightly favor consumption now over later. And that's intuitively 'normal' for people. Consumption now ought to be better than consumption later. Deflation makes it easier or even encourages formation of 'weird' time preferences: consumption later/hoarding money becomes very desirable, since the hoard grows just by sitting there.
Posted by: Patrick at November 26, 2010 12:42 PM
Thanks for your robust comments; they make sense, at least until I considered: How does one then account for goods for which the public "expects" prices to decrease, or at least the implied value to increase at a constant price. Electronics come to mind, and while I've seen many raise this issue, not sure I've ever seen a cogent response. By extension, assume we kept discovering more and more peoples around the globe to whom we could outsource our production, i.e. prices on more and more real goods continued to decrease. That seems to be the state of affairs in the last 20-30 years, and despite a deflation scare in the Greenspan years, we've always had positive inflation. Is this a simple result that the Fed has always increased the money supply at a faster rate than society's needs? The Fed did this to counter all that "deflation?"
Actually, these questions sound like a topic Prof Hamilton would have handled long ago. Apologies if redundant.
Posted by: Rob at November 26, 2010 01:36 PM
Twist & joke about it anyway you want to. You can find stats to support any thing you want to discredit. But reality hasn't meant that more money has created more jobs - while keeping inflation at bay.
You can throw out all of the current specialized price indices.
Contrary to economic theory, & Nobel laureate, Dr. Milton Friedman, monetary lags are not “long and variable”. The lags for monetary flows (MVt), i.e. the proxies for (1) real-growth, and for (2) inflation indices, are historically (for the last 97 years), always, fixed in length. However, the FED's target, nominal gdp?, varies widely.
What you target is the rate-of-change in monetary flows over and above the rate-of-change in the real-output of goods & services. But that's not possible without reporting bank debits.
I.e, economists never stumbled upon GOSPEL (economists flailed about with incoherent & failed attempts like the “debit-weighted" money figures developed by Dr. Spindt). I cracked the code in July 1979.
I.e., the FED has never cooperated by supplying continuous, comparable, and timely data.
There is a surrogate time series if your fool enough to rely upon soley on the money stock (without regard to velocity). But you wouldn't be lost on "easy" or "tight" money policies. And you would discover that black swans (like "Black Monday") were actually entirely the FED's fault.
Posted by: flow5 at November 26, 2010 01:42 PM
"The value of money as a medium of exchange is its purchasing power. If prices, rise, the value of money falls, & vice versa. From the standpoint of the economy the value of money could be represented by a index of prices. Actually no such index exists since an over-all index or average of all prices has very little practical use and would be extremely difficult, if not impossible, to compute. Instead, agencies which collect and compile price data create specialized types of indexes, such as wholesale prices, retail prices, consumer prices, non-agricultural prices at wholesale, agricultural prices, and prices of basic raw materials. It may be said, therefore, that no single figure is compiles which represents the value of money.
The value of money to any particular individual is probably not represented by any price index. In the first place any given individual is in all probability not average, that is, he does not consume commodities and services in precisely the relative volumes as is presumed by the “weights” contained in any given price index…" Leland James Pritchard (Ph.D, Economics, University of Chicago 1933).
Posted by: flow5 at November 26, 2010 02:09 PM
I gather that commenters don't understand how housing is in the CPI. It isn't housing "cost" meaning house prices. The BLS list starts with "rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture." If you then look at the actual trend of basics like owners' equivalent rent you see it's been flat, not falling, and has actually risen slightly, though with variability.
In blunt words, the idea passed around and often seen in comments here that CPI is way off because housing drags it down is utter nonsense. House prices are down, but house prices were switched out of CPI in 1983. That means during Ronald Reagan's presidency and since he is a mythic saint that must have been correct.
Posted by: jonathan at November 26, 2010 02:53 PM
"Twist & joke about it anyway you want to. You can find stats to support any thing you want to discredit. But reality hasn't meant that more money has created more jobs - while keeping inflation at bay."
The reality has been a slowdown in money creation and a slowdown in velocity. As a result we've seen a reduction in output, jobs and inflation. Nothing surprising from a monetarist's point of view.
Posted by: Mark A. Sadowski at November 26, 2010 03:04 PM
Another terrific and stupendous post. I always love your graphs and love your analysis. When I want to know what is going down on inflation I come here. I am sure you have many duties with students and family, but I hope you'll keep pressing with your blog work here when you can. I for one appreciate it.
I also like how you take the time to answer people, it pays respect to your readers, and not all bloggers do that. Take care.
Posted by: Ted K at November 27, 2010 03:54 AM
What data series to you reference in FRED for the first chart?
Posted by: Michael at November 27, 2010 04:52 AM
Rob "How does one then account for goods for which the public "expects" prices to decrease, or at least the implied value to increase at a constant price. Electronics come to mind"
Lower prices due to technological advances are quite different from lower prices due to broad deflationary pressures. If the price of some electronic good drops because of technological leaps, that simply means more income is now available for other products. There is no net loss in aggregate demand. Deflation is different. Deflation means that economic activity overall is contracting. Under deflation prices don't fall because of technological investment in highly demanded products; they fall because people aren't buying. In the case of many electronic goods there is strong consumer demand for a product and this strong demand drives technological investment, which drives down prices. Yes, people have come to anticipate those kinds of price reductions in electronics, but by the same token they tend to take that savings and use it to buy the next hot gadget. All that is very different from deflation, which describes a broad tendency for consumers and businesses to just sit on cash.
Posted by: 2slugbaits at November 27, 2010 05:41 AM
How does one term a situation where housing and durable drop in price and food and energy are going up in price very quickly?
Posted by: Keating Willcox at November 27, 2010 05:59 AM
Flow5/Anonymous: So, if I am to understand correctly, you eschew all price indices as basically misleading? And you also reject all money stock indicators for a similar reason? I infer your ideal measure is a private sector bank liabilities, since you focus on debits. Is that correct?
TedK: Thanks for the compliment!
Michael: FRED series PCEPILFE and CPILFESL, for core personal consumption expenditure deflator and CPI, respectively.
Rob: To add to 2slugbaits' comments, one could think of the electronics prices falling while other a stable or rising as a relative price decline which induces switching toward electronics and away from other goods; while all prices falling as tilting the intertemporal relative price of consumption, which in the presence of other rigidities could lead to unemployment. This is not inconsistent with 2slugbaits' view, just another way of interpreting it.
Posted by: Menzie Chinn at November 27, 2010 08:53 AM
2slugbaits: Thank you very much
Posted by: Rob at November 27, 2010 09:25 AM
Keating Wilcox wrote:
"How does one term a situation where housing and durable drop in price and food and energy are going up in price very quickly?"
The food component of the PCE peaked in November 2008 and fell a total of 2.0% by September of 2009. Then it rose modestly through April of 2010 (at about a 1.9% annual rate) but since April it has only risen at an annual rate of only 0.5%. The index is still 0.5% below the previous peak nearly 2 years ago. I perceive the modest rise it experienced late last year through early this year as a "dead cat bounce" after nearly a year of deflation.
Similarly the energy component of the PCE peaked in July 2008. It plunged 36.2% by December 2008. Then it bounced back up 23.9% through January 2010. Since January it has risen at an annual rate of only 0.2%. It's still off 20.5% from its previous peak over two years ago. Last year's increase was another dead cat bounce.
So both food and energy have plateaued this year after partially recovering from a drop.
In short both food and energy (but especially energy) are volatile. They are dropped from core inflation precisely because they have a tendency to gyrate, often dramatically. So the real story about food and energy prices over the last three years is no story.
P.S. According to the Energy Information Administration gasoline is the same price at the pump it was in October 2007, three years ago.
Posted by: Mark A. Sadowski at November 27, 2010 09:49 AM
Since the beginning of 2009, then, it looks like core inflation is falling, whereas food inflation is picking up. (How about energy?) This seems to imply that real wages are falling. If this is the best the Fed can do re inflation, maybe they should stop trying to help.
Posted by: don at November 27, 2010 11:36 AM
There never would have been a housing crisis if the G.6 release wasn't discontinued (right before the boom started). The alarm bells would have been sounding loud & clear. I.e., financial transactions aren't random (as the FED's research staff always insinuated).
Posted by: flow5 at November 27, 2010 11:58 AM
"Since the beginning of 2009, then, it looks like core inflation is falling, whereas food inflation is picking up. (How about energy?)"
Food prices fell 2% from November 2008 to September 2009. Then they modestly rose through April 2010 and stabilized below their previous peak.
Energy prices fell 36% from July to December 2008 and then rose by 24% through January 2010 and then stabilized 20% below their previous peak.
Food and energy prices are still below peak two years later and have been flat for much of 2010.
Posted by: Mark A. Sadowski at November 27, 2010 12:55 PM
Data has always been a problem. Going back to the G.6:
The Depository Institutions Deregulation and Monetary Control Act (henceforth DIDMCA), by legalizing the widespread use of the NOW type of checking accounts by Savings and Loans (S&Ls), Credit Unions (CUs) and Mutual Savings Banks (MSBs) immensely accelerated the rise in Vt, as did the introduction of money market funds (MMFs)...
All the demand drafts drawn on these institutions cleared through DDs – except those drawn on MSBs, interbank, and the U.S. government. I.e., 1) MSB balances in the commercial banks (CBs) were designated as inter-bank demand deposits (IBDDs) presumably because MSBs are call banks. MSBs were intermediary financial institutions – intermediary between saver and borrower.
This error originated in 1913 & ended with the discontinuation of the series in 1996.
1) Since Mutual Savings Bank’s (MS B) inception, it has been illogical that their account balances in the Member Commercial Banks (MCB)were designated as inter-bank demand deposits (IBDD’s –balances maintained by customer banks in correspondent banks), presumably because MSBs were called banks (with the exception of 6 MSB banks that had MCB regulations) and were insured by the Federal Deposit Insurance Corporation (FDIC) and not the Federal Savings & Loan Insurance Corporation (FSLIC), and not counted in M1.
I.e., at the same time S&L’s deposits were insured by the FSLIC and their balances in the MCBs were not designated as IBDDs (were counted in M1); neither institution had the right to hold deposits transferable on demand, without notice, and without income penalty (the legal basis for becoming a MCB), prior to the Depository Institutions Deregulation & Monetary Control Act (DIDMCA); both were the customers of the MCBs; and neither had Regulation Q restrictions prior to 1965.
The construction of economic data is important, indeed critical, if you are going to measure economic performance.
Another example from Rebecca Wilder:
"These days it's all about credit. I'm sitting in Cosi right now - bought a sandwich and charged the bill on my credit card. Actually, I prefer to use cards. But M2 doesn't account for this transaction as money if the balance is never paid in full. M2 is essentially currency, checking deposits, saving and small-denomination time deposits, and readily available retail money-market funds (see Federal Reserve release).
One can argue about the merits of including credit cards balances as "money", per se. However, the sharp reversal of revolving consumer credit, and likely through default (see the still growing chargeoff rates for credit card loans), would never be captured in M2. The hangover from the last decade of households using their homes as ATM's (i.e., home equity withdrawal) and running up credit card balances to serve as a medium of exchange is dragging nominal income growth via a sharp drop in aggregate demand."
But the G.6 didn't have this problem. It captured the majory portion of aggregate monetary purchasing power (with the exception of cash transactions - the black market).
Posted by: flow5 at November 27, 2010 01:34 PM
SADOWSKI: "The reality has been a slowdown in money creation and a slowdown in velocity. As a result we've seen a reduction in output, jobs and inflation. Nothing surprising from a monetarist's point of view."
YOUR TALKING TO THE GURU. Greenspan never "tightened" monetary policy - despite 17 raises in the FFR. Then, Bernanke finally "tightened" for 29 consecutive months, never "easing" until Lehman Brothers declared bankruptcy.
Posted by: flow5 at November 27, 2010 01:44 PM
"Then, Bernanke finally "tightened" for 29 consecutive months, never "easing" until Lehman Brothers declared bankruptcy."
If one counts interest on excess reserves (October 6th 2008) he never eased and we're witnessing the results.
Posted by: Mark A. Sadowski at November 27, 2010 03:27 PM
Interests payments on Banks reserves, reserve amount uplift requirements are CBs operative security tools.
The main question when is it too late?
Credit growth was from 2005 2007 above average from month to month P18
If sampling may offer thoughts guidelines, financial crisis may reveal the weakness of the capital structure and the intensity level of capital leverages.
IMF French Banks amid the global crisis Yingbin Xiao
Not factored (cannot be) in the study is the real amount of required provision for credit,loans ,contingent liabilities write off.
Central Banks in Europe should be compelled to supply through their websites the capital leverage of the domestic and foreign banks operating in their territory.
Posted by: ppcm at November 28, 2010 12:01 AM
I need some help when it comes to measurement. For example, is core inflation rising or falling:
(1) if the rate-of-change is positive (first derivative), or
(2) rate-of-change is falling, (based upon the second derivative)?
Money flows are still falling (second derivative) & will continue downward for the next 3 months.
Posted by: flow5 at November 28, 2010 06:32 AM
"are CBs operative security tools"
The stoppage of the flow of funds is no security blanket. It is contractionary. I.e., from a SYSTEM's standpoint, the member banks do not loan out existing deposits. Savings are impounded within the CB SYSTEM. And IORs absorb savings.
However, the same cannot be said for the bank's capital stock cushion, preferred stock, notes, debentures, etc.
Moreover, the collapse of the SHADOW banking system (the actual intermediaries between savers & investors), has thwarted the economic recovery. 1966 is a perfect example involving reversing the flow of savings into real investment.
Posted by: flow5 at November 28, 2010 08:24 AM
"Rubbish. Food prices fell 2% from November 2008 to September 2009. Then they modestly rose through April 2010 and stabilized below their previous peak. Energy prices fell 36% from July to December 2008 and then rose by 24% through January 2010 and then stabilized 20% below their previous peak."
But according to the Department of Labor, energy prices in October were up 6 percent from October 2009, and gasoline prices were up 9.5 percent over the same span, whereas the Labor Department's Consumer Price Index for October says food-at-home prices are up 1.4 percent for the year.
All depends on the dates you choose, doesn't it? Those following food prices seem to agree we have seen moderate inflation in these areas of late and are in for more (http://thetimes-tribune.com/news/food-inflation-drives-up-cost-of-thanksgiving-dinner-1.1066919), whereas the recent trend in core prices looks to me to be clearly downward, hence my observation on real wages.
We’ll see if the index of real wages keeps up with core inflation going forward, but as QE may have different effects on these indexes, it may be useful to follow the trends going forward.
Posted by: don at November 28, 2010 09:38 AM
flow5: Since inflation itself is the first derivative of the (log) price level, I'm not quite sure what you're referring to. Core inflation, plotted in Figures 1 and 2, is falling unambiguously at m/m or 3 mo. horizons. Whether it is falling at an accelerating pace depends on whether it's core CPI (no) or core PCE (yes).
Posted by: Menzie Chinn at November 28, 2010 09:39 AM
Thanks. The numbers that I track also show that the CORE PCE will continue to fall for 3 more months:
2010 jan ….. 0.53 ….. 0.22 top
….. feb ….. 0.5 ….. 0.08
….. mar ….. 0.55 ….. 0.07
….. apr ….. 0.55 ….. 0.13 top
….. may ….. 0.47 ….. 0.05 bottom
….. jun ….. 0.47 ….. 0.03
….. jul ….. 0.5 ….. 0.07
….. aug ….. 0.49 ….. 0.07
….. sep ….. 0.54 ….. 0.06 Top
….. oct ….. 0.39 ….. 0.03
….. nov ….. 0.31 ….. -0.01
….. dec ….. 0.23 ….. 0.03
2011 jan ….. 0.04 ….. 0.03 bottom
….. feb ….. 0.12 ….. -0.02
….. mar ….. 0.21 ….. -0.01
DEC, JAN, & FEB #'s fall precipitously. But then the 3 month rate-of-change in M1 is soaring @ 14.3%. Interest rates are set to rebound along with the interest expense on the Federal Debt.
Posted by: flow5 at November 28, 2010 10:56 AM
Thanks Prof for the alternative viewpoint, very helpful.
Posted by: Rob at November 28, 2010 11:00 AM
Here were my observation when looking at BEA data last week.
I think QE is causing disinflation via giffen behavior, low expectations of future income and higher relative prices of consumables creating uncertainty and increasing the demand for savings and liquidity, and inflated equity and assets prices making investment unattractive to the broader population.
I think it's safe to assume that food and energy prices have similar consumption effects to this: http://www.econbrowser.com/archives/2008/12/the_oil_shock_a.html
Savings as a percentage of disposable income has fallen from 6% in May to 5.3% in Sept. Disposable income has increased .3% (not annualized), that's much less than inflation. But I think prices are likely cutting into savings rather than people purchasing more.
The food price rise is higher than inflation. The current short term rfr's for less than 1 year are between .13% and .22%. At 7-10 times the rfr, 1.4% inflation is hardly insignificant.
You need to consider the price rise relative to inflation, income, and expenditures.
Monthly Personal Income
Using BEA Table 2.6. Personal Income and Its Disposition, Monthly and Table 2.4.5U. Personal Consumption Expenditures by Type of Product, Monthly, I classified as non-discretionary expenditures:
Food and Beverage
Financial Services and Insurance
Housing and Utilities
Over the past decade, Food and beverage has floated between ~7% and 8% of Disposable Income, generally just above 7%. It is essential flat for the year, Starting at 7.06% fluctuating and dipping to 6.9% and finishing Sep. just over 7.1%. As a percentage of disposable income after non-discretionary expenditure excluding Food and Beverage, it is between 12% and 13%. Fairly constant for the decade.
Non-discretionary expenses as a percentage of disposable income is fairly constant at about 50% , between 49% and 50.5% for the 90s. This is also the case through about mid 2004. After spring 2005, non-discretionary expenditures become about 52% of disposable income. After Oct 2008, it drops back down to about 51%. It gets close to 50 for April and May 2009 and climbs again to about 51.5%. 2010 starts at about 51.7% drops to 51.1% in June and is just below 51.5% in Sep.
Looking at the past 10 years, the stressors clearly are Healthcare, rising from 25.5% of DIaNDE to 30.8% in Sep., Gasoline starting at 4.2% dropping to 3.2% in 2002 and peaking at 8.4% in July 2008 and finishing Sep. at 5.6%, last is housing climbing from 32% to 35.4%, finishing Sep at 34.5% (housing costs include utilities).
Food and energy never fell enough to get back to pre-2005 trend.
Posted by: aaron at November 28, 2010 03:13 PM
To meet projected demand, we are going to need to find or create four new untapped saudi Arabias, and we must achieve that by 2030 or sooner. Hah, good luck with that. We'll see $300-$500/barrel oil by 2030, if our social system lasts that long as food prices ramp up synchronously with oil prices.
Let's say it takeas $6k/year to feed a person in the U.S. Now imagine it costing $30k after-tax dollars to feed that person. And that's not counting shelter, energy, transportation, education, clothes or health care costs. I suspect that's what we will see by 2030. There is no substitute for fossil fuels. We're past peak oil, peak coal will be happening soon, as will peak uranium, peak phosphorous (also vital for food production).
And forget electric cars as a solution. Electricity is not an energy source. Where does the electricity come from? Uranium plant? Uranium will peak too. Coal? About to peak. Natural gas? Not near peak YET but if we run our electrical grid on it then it will peak too, and it won't take long. Biofuel? Hah, we don't have enough arable land unless we want to burn people indirectly (via starvation) to satisfy our transport needs.
There will be oil/fuel and food rationing by 2030, if we are so fortunate to even still have a government by then. We're one or two epic climate catastrophes from panic and collapse RIGHT NOW.
What might cause such a panic? A virulent disease, perhaps, like the 1918 influenza. Or a BIG chunk of Greenland cracks off, creating a tsunami that wipes out Boston, New York City, Washington DC and London. That'd probably do it. Or anything like that, really.
We're close to the edge right now. Be prepared, so when the lights go out and there's no gas at the gas stations and 911 stops working, you have a plan of action.
Posted by: Jon at December 2, 2010 03:26 PM