Thursday, December 17, 2015

Sticky Prices: There Actually Is A Little Bit Of Inflation In the System

Putting on my academic hat for just a moment, today's mini-lecture is: Don't get so caught up in the wealth-enhancing beauty of declining commodity prices that you lose sight of the fact the long term return on commodities is zero. That return factoid is true (so far) because commodities are one of the most mean-reverting price series out there and one of these days, without much fanfare, the moves will decline in amplitude and prices will bottom.

Lesson over.
Short enough for ya?

From Slope of Hope:

Consumer Prices: A Sticky Situation
We have noted anecdotally that there is a creeping inflation in the system. It does not show up in commodities, which are in a post-bubble (ah, the good old ‘China story’ that was so vigorously promoted to a degree that would make a gold bug promoter blush) melt down. Crashing costs like that are providing the Goldilocks-like balance to rising costs within the economy. 
This morning, the highly recommended Daily Shot had among its macro graphs a look at the “sticky” consumer price index. That got me to go over to the St. Louis Fed website and pull a couple different views of it. First, here is SLF’s description of the sticky index… 
“The Sticky Price Consumer Price Index (CPI) is calculated from a subset of goods and services included in the CPI that change price relatively infrequently. Because these goods and services change price relatively infrequently, they are thought to incorporate expectations about future inflation to a greater degree than prices that change on a more frequent basis. One possible explanation for sticky prices could be the costs firms incur when changing price.”
These could be considered the embedded costs within the economy, like the steady upward march in healthcare or my trash collector’s price increases due to administrative and regulatory issues built into this particular service (despite dropping fuel costs). 
Is this one of the graphs the Fed is eyeing as it prepares to initiate a rate hike regimen? That’s a bullish looking breakout in sticky costs. How long can the commodity crash and associated Goldilocks be ridden? I think the Fed is rightly in anticipation mode....MORE