US Inflation Trounces New Orders

-Report Shows Prices Rise as Orders Fall

(SEATTLE) 08/19/2004 - The worst fears of economists have been confirmed by today’s Philadelphia Fed report—that the Federal Reserve is so far behind in raising interest rates, that higher prices are creating bottlenecks for US orders and production. (1)

In today’s report, all current indexes fell except the prices paid index--which rose. This means that firms and the overall economy at large are falling into an inflationary cycle that is so bad, it is causing bottlenecks and disruptions, including job loss.

One of the problems leading to this scenario is the common focus on the US Consumer Price Index (CPI) as if it were reliable. However, due to a number of recent adjustments and macro-economic peculiarities, a large part of the CPI is inversely related to costs, instead of positively related. Such includes housing costs, as well as vehicle costs--with large auto companies having production and credit monopolies, while dropping the “list/rebate” price on vehicles so as to effect a net benefit via their credit arms. This creates the false image of “deflation.”

A similar problem led to the Great Depression—vast numbers of companies found they could sell things on credit at low prices, giving the false impression of low inflation, even while principal financed amounts went up. Although a Depression doesn’t appear likely, a bond market crash does, as debt instruments will soon be re-priced to include actual value and risk.

The inflationary trend shown in the Fed report is further confirmed by the leading indicators in the Journal of Commerce ECRI Industrial Price Index, which is breaking out to new highs.

(1) “Firms again reported higher prices for inputs and for their own manufactured goods” (August 19, 2004)

[Demeter]

1. Stagflation--It's a Bush Thing

Well, they brought back the good old days--good for who, you ask? I'm too old for this, you say? It's been years, not days, you add?

Tell it to the Marines--the Commander in Chief isn't listening.

2. It was obvious, but I am not old enough...

Tell me, were bonds trading at 4 percent in the 1970s?

[jackieforthedems]

3. Bush Is Just Another Hoover

Bush is just another Hoover. Heard the Republicans will be passing out more rose-colored glasses at their convention later this month. Glad the Democrats can see the real story.

[Jim__]

4. "higher prices are creating bottlenecks for US orders and production"

Higher prices are creating bottlenecks - I don't understand what that means. A bottleneck usually implies high volume of traffic trying to get through a narrow point and backing up because not all the traffic can get through the point. I would think higher prices would reduce demand, and so reduce "traffic." What am I missing here?

[necso]

5. Demand is rarely as flexible as

some economists would like to have one believe.

And if costs go up, for the same level of spending you get less inventory and can make less product. So when costs go up (and selling prices go up -- if one can raise prices) supply can lag behind (inflexible) demand. If more profit cannot be squeezed out of higher prices, there can be long term supply problems, as working capital does not rise with prices. Of course one can use higher borrowing to offset the problem, but it does not change the dynamic.

You can also get speculation and hoarding phenomenons, which act to reduce available supply. That is, demand can go UP and supply DOWN as prices go up. Indeed, since speculators effectively control many fundamental items, like oil, it can be expected that a speculation binge will reduce supply as a commodity is held off of the market in expectation of higher prices and this may result in a sharp rise in prices, at the same time as supply goes down. For many commodities, there is, in the best case, some delay to increase supply -- should any supplier see it in his interests to bear the costs and risks (market may go down) of increasing supply because of a "temporary" supply deficiency.

Of course, you can add to this, suppliers deliberately reducing supply to jack prices up further.

The market does not really work like Economics 101 portrays.