A Sudden Rise from the Deathbed

Advice from the federal substitution board: eat more cat food.

Another month…another 'surprise increase in CPI'. We have only discussed the topic of rising consumer prices a month ago (see “Inflation in the Nation”, which has a few guesses why they might possibly be rising…), and then again when Marty Feldstein found himself belittled for saying CPI might come in, well, higher than expected (“Inflation Warnings Ridiculed”).

It just did:

“U.S. consumer prices rose sharply in May for the second straight month and the rate of inflation over the past year reached its highest level since late 2012, an upward trend that could worry the Federal Reserve unless it abates soon.

The consumer price index jumped a seasonally adjusted 0.4% last month following a 0.3% gain in April, the Labor Department said Tuesday.”

If this continues, it's going to be a trend. And it might alarm the planners, or rather, the 'plotters', as they are apparently called nowadays:

In the past 12 months, consumer inflation has climbed by an unadjusted 2.1%. Just eight months ago, inflation was running at just a 1% pace.

The Federal Reserve has been aiming to boost inflation to around 2% or so from what it considered an economically damaging low level, but the sudden surge could set off alarm bells. The central bank might be forced to raise U.S. interest rates earlier than it planned unless the pace of inflation levels off.

Top central bankers meet this week to plot their next move and Chairwoman Janet Yellen will hold a press conference on Wednesday.”

It is precisely this plotting that is the main issue these days, since the market's miraculous act of levitation depends on them staying “benign” (= free money from thin air forever & ever) for as far as the eye can see.

Things are luckily not as bad just yet as in the picture below:

When this happens, the genie will definitely be out of the bottle.

In fact, the year-on-year price increase still looks fairly harmless, so there is no reason to panic just yet. We distinctly remember though that many a Fed member, including the new chair, was worrying about there not being enough monetary debasement as recently as 6 or 8 weeks ago.

Some of the report's detail are sure to raise an eyebrow or two though.

“ Food costs were up 0.5 percent, the largest increase since a similar gain in August 2011. Food costs have been driven higher this year by an unusually harsh winter and a drought in California.

Energy costs were up 0.9 percent in May, the biggest one-month gain since December. Gasoline prices increased 0.7 percent last month.

Outside of food and energy, there were widespread price pressures as well. Airline tickets were up 5.8 percent in May, the biggest one-month gain since July 1999. The cost of clothing, prescription drugs and new cars all showed increases in May.

It's a good thing that neither food nor energy are part of the 'core inflation' index. Airline tickets, clothing, prescription drugs and new cars should probably be taken out as well, as they are obviously way too volatile.

We're closing in on a technical breakout here – via St. Louis Fed – click to enlarge.

Meanwhile, in Housing Land

It was evidently a bad day for data, because: Housing starts fall 6.5% in May as Marketwatch informs us. The recovery we had thought was already in the bag apparently was only “hoped for”. Someone must have demoted it while we weren't paying attention.

“Construction on new U.S. homes fell by 6.5% in May to an annual rate of 1 million units as a hoped-for revival in home building remained elusive, new government figures show. And permits for new construction, a sign of future demand, fell by 6.4% to a 991,000 annual pace, the slowest in fourth months, the Commerce Department reported Tuesday.

Tarnation. To pump, or not to pump, that will be the question on Thursday. Our unscientific guess at this point is that 'tapering' will continue, and one of these days, it will actually matter (those who think it won't must stop with the Kool-Aid).

And then there is always this (from Marketwatch again):

“The uptick in inflation is also a scourge for American workers. Real or inflation-adjusted hourly wages fell 0.2% in May as the rising cost of consumer goods outraced the modest gains in worker paychecks.

Real wages have actually fallen 0.1% in the past 12 months, suggesting that Americans have little ability to increase spending and thereby boost the economy — unless they save less or take on more debt.”

Reminder to whoever penned this: “spending” doesn't create growth, and saving less is the last thing that is needed. Falling real incomes however are par for the course given the Fed's ultra-loose monetary policy.

Tuesday's probably soon forgotten combination of data points reminds us of another cartoon we have recently come across:

An illustration of what the Keynesians once thought was 'impossible'.

Conclusion:

Economic data generally continue to be so-so, they seem to be neither here nor there, but definitely are not indicating anything resembling a 'strong recovery'. That official consumer prices are misbehaving a bit of late is a new wrinkle. It may not be a trend yet, but the wherewithal in terms of money supply creation over recent years to make it one certainly exists.

Keep in mind that contrary to widely held convictions, there is really no such thing as the 'general price level'. There are only prices. The 'general price level' cannot be measured. It must be a meaningless datum, because there exists no constant to measure it with. Why not? Because money has a supply and demand just as goods and services do. Every single one of the things employed in the 'calculation' (we employ the term loosely) of CPI is continually changing. In other words, we are discussing a nonsense number.

Not only that, the government has altered the calculation of the number in a myriad ways over the years, always in the same direction (i.e., to make it look as low as possible). Today's data cannot be compared to those of say 10, 20, or 30 years go. All we can state with some certainty is this: if this official number were to suddenly rise a lot more quickly, it would be meaningful for that reason alone.