Low inflation? Ya, right

Low inflation? Ya, right

Thursday, April 17, 2008
Not everyone is buying the idea that the U.S. inflation rate is relatively benign and therefore nothing for the Federal Reserve to worry about as it slashes its key interest rate. Some observers believe the actual rate is closer to 9 per cent, rivalling China's problematic rate of inflation.

Martin Hutchinson, writing on Breakingviews.com (subscription required), noted that the official change in the consumer price index, as reported by the Bureau of Labor Statistics, showed a rise of 0.3 per cent in March. Big deal. But that is only after BLS changed its seasonal adjustment policy drastically.

Traditionally, BLS has seasonally adjusted the March rate downward, by an average of 0.2 percentage points over the past 10 years, and at most 0.3 percentage points. This time, according to Mr. Hutchinson, the seasonal adjustment was a baffling 0.6 percentage points because of a change in the methodology in January.

If instead the seasonal adjustment had followed the average, the March reading for the consumer price index would have been 0.7 per cent, more than double the official 0.3 per cent, which amounts to an inflation rate heading toward 9 per cent on an annualized basis.

“That is remarkably close to the inflation rate in China, where the central bank is busy raising rates and squeezing financial institutions,” Mr. Hutchinson said. “It's well above the rate in the euro zone, where the European Central Bank has held rates constant, without letting troubled banks run out of money. But the Fed has been cutting while prices rise.”

Barry Ritholtz, writing on The Big Picture blog, couldn't agree more with the 9 per cent figure floated by Mr. Hutchinson: “That's a little closer to reality than the reported nonsense we got yesterday,” he said.

“Unless of course you believe that food prices in the U.S. have only risen 4.5 per cent over the past 12 months. Other countries with much stronger currencies are suffering from global food inflation in the double digits – but we of the free-falling American Peso have inflation under control. Does that smell kosher to you?”

© Copyright The Globe and Mail