The following story from Dow Jones details several factors which reveal the totally contradictory claims being made by so many analysts that dominate the financial reporting here in the US.
On the one hand, we are continually reminded over and over again how the overall economy is improving. We are told that business profits are rising in an environment which is seeing strong global growth and that this strength is going to be reflected in the US where predictions are for a growth in the range of at least 3.5 % this year.
On the other hand, we are told that inflation is not a problem. Businesses for the most part are choosing not to pass along the rise in input costs reflected in the PPI from yesterday because of the lackluster job market and the resultant reluctance of the consumer to spend. In short, businesses do not want to risk losing market share in this sort of environment and thus upward pressure on prices at the retail level is minimal.
The big problem with this line of reasoning is that it is utterly illogical. Perhaps this is what happens when the school system no longer teaches students how to actually think.
If business is reluctant to pass on price increases then how can profits grow particularly if the consumer is supposedly reluctant to spend. If I spend x dollars to produce a product and sell it for x + 2 dollars, what happens if the cost to produce the product goes up to x + 1 and I still am forced to sell it for x + 2? Obviously profits shrink. If profits shrink how can I expand hiring and put more people to work? Answer - I cannot.
So which is it? Is the economy gathering steam or is inflation not a problem? It cannot be both.
I believe that the Fed's liquidity injections are indeed feeding into the economy and that inflation is indeed a problem and that no business can long survive in an environment in which its input costs are rising and yet it does not pass along the rise to its end users or to the consumer. Business exists to make profits - no profits - no growth; no growth - no hiring.
Just today the CCI (Continuous Commodity Index) pushed yet to another all time high in price before retreating somewhat. As far as I am concerned, this index is the best economic indicator that I need to tell me whether or not input costs are rising.
As mentioned in my post yesterday, once the velocity of money begins to increase in the US economy, we will see more and more that statistic juggling notwithstanding, inflation pressures will be on the rise here, just as they are all over the globe. Prices will indeed be forced upward at the retail level just as they already are rising, expect for the fact that the government conjurers continue attempting to sweep such increases away with their contemptible manipulation of the useless CPI.
OH by the way, gasoline prices hit a 29 month high today at the Nymex! But don't worry - core inflation is completely tame!
DJ UPDATE: US Jan Core Inflation, Weekly Jobless Claims Both Rise
Thu Feb 17 10:41:20 2011 EST
(Adds analyst comment, background.)
By Luca Di Leo and Jeffrey Sparshott
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--U.S. consumer prices continued to rise in January as
energy and food prices increased, but underlying inflation remained tame as
many companies struggled to pass on higher raw materials costs to consumers.
The seasonally adjusted consumer price index last month increased by 0.4%
from December, the Labor Department said Thursday. Over the last 12 months,
prices were up 1.6% before seasonal adjustments.
But underlying inflation, which excludes volatile energy and food prices and
is considered a better measure of price trends by the Federal Reserve, rose by
0.2%. The annual underlying inflation rate stood at 1.0% last month, below the
Fed's informal target of just under 2.0%.
Economists surveyed by Dow Jones Newswires ahead of the release expected
consumer prices to rise by 0.3% and the core consumer price index to gain 0.1%.
In December, consumer price inflation showed a 0.4% monthly rise, revised from
a previously reported 0.5% gain.
Earlier this week, producer price data, which measure how much manufacturers
and wholesalers pay for goods and materials, showed underlying wholesale prices
rising the most in more than two years. That sparked concern that inflation
could start to rise more sharply.
But Thursday's figures indicate that most companies aren't passing along
price increases to consumers. One exception: clothing stores. Apparel prices
were up 1% in January.
"Looking ahead, with cotton prices at an all-time high in nominal terms,
apparel manufacturers have stated their intention to raise prices for spring
apparel, so this component may be on an upward trajectory in the coming months
and add to the core," Royal Bank of Scotland analysts said.
But overall, firms are struggling to pass higher commodity prices on to
consumers due to persistently high unemployment, which is keeping Americans
cautious about spending.
Underscoring the soft jobs market, the Labor Department Thursday said the
number of U.S. workers filing new claims for unemployment benefits increased by
25,000 to 410,000 in the week ended Feb. 12.
Economists surveyed by Dow Jones Newswires had expected claims would rise
last week by 17,000 to 400,000.
"With the unemployment rate still at 9.0%, there will be plenty of downward
pressure on underlying prices and so we don't expect core inflation to trend
upwards," said Paul Ashworth, chief U.S. economist at Capital Economics.
New claims figures have been volatile in recent weeks due to severe winter
weather. Now, the jobs market appears to have stabilized near January's levels.
The four-week moving average of new claims, considered a more reliable
indicator because it smoothes out volatile data, increased 1,750 to 417,750 in
the week ending Feb. 12. Jobless claims have been on a gradually downward trend
since September 2010.
"The longer-run trend in the claims data remains consistent with a healing
labor market," said JPMorgan Chase economist Daniel Silver.
At their last meeting three weeks ago, Fed officials said they still expect
slow price increases over the next two years and unemployment to remain close
to 9.0% until the end of 2011.
Thursday's Labor Department reports showed that higher prices for energy
commodities and food accounted for more than two-thirds of the rise in consumer
prices. Food prices rose 0.5% in January, the biggest increase since September
2008, with all six major grocery store food groups showing gains.
Energy prices continued their recent string of increases, rising by 2.1% last
month as the gasoline index went up for the seventh month in a row.
In the meantime, real average weekly earnings fell 0.3% over the month in
January as both the average workweek and hourly earnings dropped, the Labor
Department said.
The Labor Department's report on consumer prices can be found at:
http://www.bls.gov/news.release/pdf/cpi.pdf.
-By Luca Di Leo and Jeffrey Sparshott, Dow Jones Newswires; 202-862-6682;
luca.dileo@dowjones.com
(END) Dow Jones Newswires
02-17-11 1041ET
Copyright (c) 2011 Dow Jones & Company, Inc.
