There is a tremendous fixation on the inflationary components of CPI. The most obvious driver of headline CPI is gasoline, as per the fantastic Monetary Trends piece. Without it, even the rate of headline inflation keeps dropping, and the largest risk is clearly falling inflation.
How can that be!!, you say. What consumer prices have declined over the past few years?
Let’s start with new cars:
There definitely has been a substantial move off the bottom. The initial bottom was put in by Cash For Clunkers, and it was widely viewed as policy which would only temporary boost spending with future demand theft. This clearly is holding untrue through present. There is no doubt, however, that new cars are cheaper and better than most of the past 15 years.
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There was a substantial bump after Cash For Clunkers as supply was destroyed. The Manheimm Used Car Index which measures wholesale value (rather than consumer prices, which is what CPI measures) is at an all-time, but the end-prices are not close to their previous highs.
Download this gallery (ZIP, null KB) Despite the cotton move from $40 in January 2009 to $220 this year, the end-price of clothing has cratered. This is reflective of a few realities: a) inputs aren’t a large portion of US end-prices and b) substitutes work. Home Energy:
Download this gallery (ZIP, null KB) What do you know – the guys knocking on your door in 2008 trying to sell you fixed rate natural gas contracts marked the top in that market….
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Download this gallery (ZIP, null KB) This is clearly also coincident to new housing construction falling to a very low rate in nearly every developed economy, so there is plenty of slack in manufacturing these goods.
iPods, TVs, speakers:
Download this gallery (ZIP, null KB) At the same time, the retail flows for these goods are near all-time highs.
Download this gallery (ZIP, null KB) Recreational spending has certainly fallen due to the recession, but prices haven’t responded much to the substantial ex-transfer income rebound in the past year. When the prices of two largest components of consumer expenditures (housing, 33.8% and transportation, 17.6%) drop so dramatically, inflation will remain subdued. There’s no grand conspiracy to keep the headline number down
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