16 January 2016

Jimmy McMillan Was Right

The divergance becomes

A convergence when rent is removed
Over at the Wall Steet Journal, they note that reason for the divergence between the CPI and PCE when juxtaposed wit the PPI is that the PPI does not include rent:
Prices in the U.S. are either rising or falling, depending on how you measure them.

The best-known measure of consumer inflation, the Labor Department’s consumer-price index, rose 0.5% from a year earlier in November. The Federal Reserve prefers to use the Commerce Department’s personal-consumption expenditures price index, which rose 0.4% on the year in November.

So why did another Labor Department inflation yardstick, the producer-price index, decline 1.1% on the year in November? The answer may be simple: Housing costs are rising faster than pretty much anything else, and they’re not part of the PPI.

A little background first. The PPI tracks price changes at the business level, and it was overhauled two years ago to cover a broader base of goods and services. In some cases, it can reveal inflationary pressures in the pipeline before they show up in consumer prices.

It also happens to be first broad inflation gauge released each month, earning it extra attention from economists and investors. The December PPI report will be released Friday morning, while the CPI won’t be out until next Wednesday and the PCE price index won’t be available until Feb. 1.

The PPI has generally moved in tandem with the two consumer-facing price gauges, but it has diverged from both measures over the past year. All three inflation gauges fell toward zero after oil prices began to tumble in mid-2014. The PPI kept going, dropping into negative annual territory and staying there, while the CPI and PCE measures have stabilized at low levels.

The likely culprit: rising rents. The cost of shelter, as measured by the CPI, rose 3.2% in November from a year earlier for the third consecutive month—the fastest growth in eight years. But while rent (and its equivalent for homeowners) makes up nearly a third of the CPI basket and a smaller but still substantial share of the PCE index, it’s absent from the PPI. That may explain why the path for PPI looks a lot like the path of CPI if you exclude shelter costs from the latter index.
There are a number of take aways here.

First, and most obvious is (of course) that the rent is too damn high.

The second is that an increasing proportion of our economy is going to rents of various forms rather than productive activities, which does nto indicate an economy that is progressing.

The third, and most important take away is that we are actually in a deflationary economy, like the Great Depression of the 1930s.

The reason that our economic recovery doesn't feel like an economic recovery is because it really isn't one.

We are in a deflationary spiral.


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