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Today's Commentary: 06.01.05
Inflation? Depends on Who You Ask

Ask Alan Greenspan and he might tell you that it is not a problem. Although the whitewashed notes from the latest Federal Reserve meeting show some conflicting opinions, the overall message was much the same as it has been since the tightening began. The mere fact that there was a debate on whether growth is still accelerating startled many on Wall Street and may have created a new worry for the White House. The assumption was that the economy is indeed growing and the pace is acceptable. Anything that suggested that otherwise might create allow many hidden problems to surface.

The Federal Reserve could be perceived to be at a cross roads. It has raised rates after eight straight meetings, all in maddeningly small increments. Most believe that these quarter point hikes on the short term, overnight rate are likely to continue higher for the rest of the year. Whether it will reach 4% before Greenspan's retirement party on January 31st, remains a subject of great speculation.

The concern should be not over whether the Fed governors disagree but whether the real problem lies in the GDP number for the first quarter of 2005. Using that revised number could be troublesome. The 3.5% number that the Commerce Department released on the 26th of May may have been the result of a Chinese holiday. With our albeit one-sided trading partner celebrating the New Year, it allowed just enough of a downturn in imports to effect the GDP number upwards.

A few weeks back, I wrote about what I perceived to be a growing innumeracy among the citizenry. Innumeracy is likened to illiteracy but not quite. Innumeracy results from an overwhelming flood of data, much of it contradictory in nature creating a general confusion about who or what is right - at any given economic moment. The notes from that meeting might have found such an affliction has settled over these sage academics.

At the heart of the group's confusion is the increase in jobs but not an increase in worker's compensation for those jobs. Wages have grown in April from the previous month to 0.7%. Hold the celebration though. Once you factor in inflation, that number slips from the previous month's reading to 0.2% - almost non-existent.

Prices seemed higher but productivity has taken a breather while the consumer decided to keep spending. Go figure. The University of Michigan cited this increase in confidence stemmed from lower than $50 a barrel oil - although it did not necessarily translate itself into any real relief at the pump.

The Fed was worried about their message but made clear that they are working with monetary policy to keep things under control even as they seem to spinning in and out on their own.

But the tone of the governors should change with the latest Consumer Price Index report issued this past Friday. Removing food and energy from the core of the index continues to be the easiest way to target exactly where we are inflation-wise.

Only don't ask the average shopper whether inflation is present. The price at the pumps has impacted their quality of life along with the rising cost of feeding the family. A recent informal phone survey among grocers in my area turned up the following responses. While business is up incrementally, it is not because more product is moving through the supply chain from warehouse to shelves to shopping carts. It is because it is more expensive. One food manager commented that just last year, our current sale prices were regular priced items.

Removed because of its volatility, these two key factors seem less troublesome as compared to some of the other key components of the core CPI. Nothing seems as volatile as housing prices of late nor does anything seem more orchestrated than their steady and almost heady rise in prices. With almost a full third of the CPI devoted to shelter and the Fed thinking "frothy" thoughts, the index is beginning to seem less reliable as an adequate inflation measure.

That housing is included, or more specifically shelter, is no real surprise. How it is calculated however is. The survey that is the CPI asks one important question: Could you rent your home for what you perceive it to be worth? Like many of respondents, the value of your home is based on what the market will bear and because you read the news, you value your abode at the top of its retail range.

While you understand that this price is probably higher than reality and certainly not a price that you could afford again, offering the same house as a rental would drop the overall price of that dwelling dramatically.

We tend to be capitalists when it comes to putting a price on our homes. We want to see some sort of profit above our mortgage, which in many instances is now at a level matching those exorbitant estimates of street value and a little something for your effort at keeping the place appealing from the curb. But renters understand that shelter is shelter and your overextended mortgage is not part of the equation they use to determine worth.

This part of the CPI is called the owner's equivalent rent. Greenspan has kept his pace measured all these months moving those rates up slowly but surely in the hopes that the extra incentive he has given the housing market to swell will be slowly removed. But bankers on the lower end of the spectrum, far removed from his Reserve meetings have continued to be more and more creative with their cash. To be a sellers market, you need easy financing.

This has kept renters looking to buy homes while rentable space is offered at a discount. This has kept the CPI lower. Question is, for how long?

So why does Wall Street and the White House want to keep the Fed chairman on board beyond his taregted retirement date when it is beginning to seem clear he does not have as firm a grip on his economic plan? The administration claims it is because they need more time to find a successor. Such pro tempore activity is not uncommon, a move that keeps the chairman in office while his replacement is found. Many of Wall Street have voiced their opinion about who they would like to see replace Greenspan. They want someone running the Reserve whose background is business not theoretical economics. The Bush administration would like to give the appearance of selecting a replacement whose experience as a company chief would align themselves with their pro-business environment.

While Wall Street and the administration grasp at any number that points to a successful policy - Friday it will be the jobs number again, which is expected to be well above 180,000 - it is worried that the so-called bubble created by Greenspan with his low rates will begin to deflate at a time when the economy will need another breath of economic stimulus.

The Fed chairman's freewheeling style will be easily adapted by a business titan, someone who is used to reacting quickly. If things stay on the current course, a quick reaction might be the last thing the slowing economy needs. Unlike the athlete who leaves the game at the top, Greenspan, unfortunately will not be able to do the same. By January, the game could be entirely different.

BlueMoney Report

The Blue Money Report
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