Once Again, 'Core' Inflation Numbers Don't Paint Full Picture


Those tame core inflation numbers? Well, they really aren’t so tame after all.

Tuesday brought another round of misleading government statistics relative to price increases brought on by Federal Reserve monetary policies and global growth.

This time, it was the Producer Price Index, a measure of wholesale prices that at its “core,” which reportedly strips out the volatile food and energy costs, showed a benign growth of 0.2 percent.

Headline numbers, which include the things we eat and drink and power our car with, showed an ugly 1.6 percent increase. But, of course, we’re not supposed to look at “headline” inflation, just the core numbers because they represent more constant cost patterns.

So let’s do that.

After all, the criticism against those who focus on the headline is that we dismiss areas that show decreases and only focus on those numbers that build our case for inflation.

The trouble is, in the latest report, which measures February prices, there are almost no negative numbers to be found.

One index after another shows stunning surges, none more so than the gain in finished consumer foods. Those prices jumped 3.9 percent in February, the biggest gain in 37 years, going all the way back to the Nixon administration. Fresh and dry vegetables soared 48.7 percent in just one month!

Energy prices posted shocking gains as well: Crude energy materials rose 0.9 percent in February and were up 17.8 percent over the past three months. The natural gas index jumped 7.6 percent in the month and intermediate energy goods rose 4.3 percent, the largest one-month gain since January 2010.

Here’s the worst part when it comes to energy: The PPI measures prices at a fixed date just before the mid-point of the month, which in the case of February would have been before the huge run in oil that sent crude prices over $100 a barrel and gas at the pump to $3.50 a gallon. Thursday’s consumer price numbers, which measure the entire month, should be a real hoot.

These are the costs, though, that the Fed calls “transitory” and not worthy of as much attention as, apparently, non-transitory things.

So it’s instructive to pore through the PPI numbers to find out just what kept the core PPI so “tame.”

Turns out, one has to go almost to the very end of the Bureau of Labor Statistics’ three-page report to find out what’s holding prices down.

That would be “prices received by the commercial banking industry.” Those fell 4.8 percent in February as part of a total 0.2 percent decline in traditional services industries, which is the cornerstone of the 2011 economy.

In trying to discern just why commercial banks are losing revenue, I spoke with Dick Bove, the venerable banking analyst at Rochdale Securities.

Bove said much of the reason stems from curbs on banking fees imposed through the Dodd-Frank reform bill and other measures.

“There went into effect in the middle of 2010 regulation that resulted in a significant decline in overdraft charges by banks and also by the beginning of this year the credit card rules went into effect,” he said. “Overdraft fees are probably the single largest charge that banks make on existing accounts.”

Here’s the problem: Banks generally don’t take revenue restrictions lying down, so those costs will be passed on to customers at some point. Yes, that means this particular curb on inflation likely won’t last long.

“Banks are now going to react to mandated price cuts with price increases on another range of banking products,” Bove said. “That of course is going to cause a consumer backlash. Who knows where that’s going to wind up?”

The only one standing between banks and higher fees is controversial consumer watchdog czar Elizabeth Warren. If her appointment survives a constitutionality question, that in turn will set up a big battle with banks.

If the banks win, this momentary restriction on core inflation won’t last.

That means headline inflation, with its high food and gas prices in tow, could start receiving the attention it deserves.

“We have been warning for some time that the 85% surge in agricultural commodity prices since last summer would eventually feed through into the PPI and CPI and here it is,” Paul Ashworth, chief US economist at Capital Economics in Toronto, wrote in a note to clients. “There is plenty more to come over the next few months.”


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