The Wilder View

CPI + Velocity = Trouble

Beginning of the year economic blues in the US? I think so. Just looking over Spencer’s CPI post; here is an excerpt (the first paragraph):

The CPI report was encouraging. The total CPI rose 0.2% and the year over year increase is only 2.6%. Although real average hourly earnings fell, real weekly earnings were unchanged.

The core CPI actually fell for the first time since 1982, bring the year over year change in the core CPI to 1.6%. The 6 month SAAR for the core CPI is 0.8%. Despite all the worries about inflation the normal pattern is for the best cyclical reading on the core CPI to occur in the first year or two after a recession. If the economy follows the normal pattern, the core CPI should continue to moderate for another year or two.

My first thought is that I don’t think that this is encouraging at all; and I’m not alone. Core prices fell; these prices are typically very, very sticky. For example, shelter prices are biased upwards in their calculations, but have been declining or unchanged for every month since August 2009. I know that the output gap is not directly observed, except by proxy in the capacity utilization numbers or the unemployment rate; but it must be huge to do this to housing costs.

Look at it differently: the velocity of money improved in October and November of 2009…


… but then took a step back in December of 2009. If this trend continues, non-energy prices are sure to back down much further. There’s just no support for price action at this time – the Fed can’t pull back… it probably should be putting more in.

Note on data: Macroeconomic Advisers now publishes a blog where they make available their calculated monthly GDP series (nominal and real) to the public (thank you).

Originally published at News N Economics and reproduced here with the author’s permission.

2 Responses to “CPI + Velocity = Trouble”

Wilson SiuFebruary 22nd, 2010 at 3:24 pm

So what if non-energy prices does back down further? How is that bad?Instead of worrying that prices will go down, one may perhaps worry that while the velocity of money is so low, CPI has not gottne lower than the current figure.

The AlarmistFebruary 26th, 2010 at 3:33 am

The title is misleading. It should be “Low CPI plus slowing velocity of money = Trouble.”Having said that, I agree with Wilson Siu above, that a slowing velocity of money may be masking darker aspects of inflation. The gas I buy to the store keeps bouncing up and down in price to the extent that any trend is not statistically significant, but the costs of the food I buy while at the store has been inexorably increasing over the past few years. Meanwhile, my housing costs have held steady and not declined, while other housing-related costs and taxes have increased. If those aren’t core indicators, then what is?

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