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Friday, June 13, 2008

Bob Brinker, May Inflation and GDP Growth

The US Labor Department reported today that May CPI inflation was up 4.2% over the May 2007 level. The components of CPI with the largest gains were:
This graph of the year over year percent change in the unadjusted CPI data shows inflation is anything but low on an historical basis.

[Click graphs to see larger images]

Bob Brinker said:
The other day, Larry Kudlow (CNBC) put up a chart of inflation for the past years. A few years ago when energy prices were low and the economy was growing at about 3%, inflation was about 1.9% on average. Since then, energy prices have soared, our economy has slowed to a near standstill and yet inflation has MORE than doubled!
  • ==>"The CPI is up 4.2% in the past year and has risen at a 4.9% annual pace over the past three months. "
The Fed lowered rates to help save our banking industry from the mess the idiots at the helm of places like Citibank, Wachovia, Bear Strearns, Lehman, etc. made. Those rate cuts caused the dollar to crash which has made inflation as measured in things like Gold or oil soar to hyper inflationary rates... but we don't see hyper inflation here because we measure inflation in dollars.

Economic growth has nearly vanished as we crawl along with less than 1.0% GDP growth while our inflation has doubled over the very low rate of inflation we had just a few years ago when economic growth was 3 to 5% and oil was less than half what it is today.

This final chart from my friends at Martin Capital show CPI inflation is not low as Brinker claims. Furthermore, it shows producer price inflation is even worse which puts a strain on profits and explains part of the downward revisions in S&P500 earnings estimates since companies are reluctant to raise prices now to pass on inflation to their customers. If the economy improves, then this "inflation debt" will eventually get passed to customers through higher prices since companies are in business to make money.

The chart of yearly change in CPI inflation (dark green curve on the chart) shows inflation is near a 10-year high. The price of oil has more than doubled in the past year which has caused inflation to roughly double from low 2% to a 4.9% annual pace over the last three months!

The good news is the Federal Reserve and ECRI both expect inflation to moderate since very few expect the price of oil to double again in the next year from the current level of $135/barrel. My "Inflation Expectation" chart of the 10-year US Treasury rate minus the 10-year TIPs rate show bond investors expect long term inflation to run about 2.53%.

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