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  • July 16, 2008 06:46 PM EDT by Elizabeth MacDonald

    The Inflation Haymaker Comes A Cropper

    Both of the inflation numbers, the core and headline numbers, were higher than expected and beyond the Federal Reserve’s comfort zone. I’ve been warning readers since January that the Fed opening the money hydrants to save the financials would cause inflation to gush through the markets.

    Now the core CPI is the number the Fed wants you to focus on, even though it’s a fake number as it strips out fuel and food prices. How was this number created?

    After oil prices surged during the Arab embargo of 1973-1974 then-Fed Chairman Arthur Burns had the Fed’s economists strip oil out of the CPI, reports our senior editor Charles Brady. Remember, back then the Fed was put under enormous pressure to mint money fast to pay for the Viet Nam war. And back then, when food prices began surging, Burns had food prices stripped out as well, Brady says.  The result was the “core CPI, a distorted view of inflation that underestimated the extent to which price hikes were ravaging the economy,” he notes. 

    Brady says that history seems to be repeating itself, as record-high oil prices and surging food costs put the squeeze on consumers.  The chart below shows the difference between the CPI and the Core CPI. You’re looking at the core CPI index itself subtracted from the overall CPI; essentially the spread between the two. When the headline number rises more than the core reading, the line rises.  With a CPI of 217.4 and a core CPI of 215.5 the spread is 1.9, which is the highest since June 1981, FBN editor Brady tells us.  So what does this tell us about inflation and the economy? Look at this chart, which Brady pulled together:

     

    The chart below shows this CPI-Core CPI spread compared with the Fed Funds rate. The correlation between the two is pretty amazing. On the left you can see where Fed Chairman Paul Volcker jacked up interest rates to whip inflation. As a result we saw a 24-year span where the CPI was actually LOWER THAN the core CPI (the spread was below zero). But now the spread is back up to where it was in the bad old days of the early 1980s, and rising. As was the case almost 30 years ago, it seems that the only medicine will be a sudden and sizeable increase in the Fed Funds rate.

     

     

     

     

     

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Geoff

It's no mystery that Congress doesn't want oil and food re-inserted into the index.. Those are 2 of the gargantuan industries that enjoy kid-glove treatment in the form of subsidies, tax adjustments, and price supports.. Look at the donor list.. Mountains of money flow from the farm and oil lobbies right to Congressmen.. How in the world can they ignore 2 of the largest culprits contributing to inflation ??

July 17, 2008 at 9:57 am

Jerry Attrix ..

Thank you, Professor Hsub... Our federal politicians have already found a way to finance the impending crash of the Social Security system.. More and more of them seem to be turning towards open borders and amnesty.. If the pols let the millions of illegals that are already here and the millions more they want to get amnesty and then join the SSA then there will be a huge flood of new workers paying into the system.. Voila !! Boomers are part of a huge reproductive wave right after WWII. Now the Boomers are retiring, and the new generation with a low rate of reproduction simply will not be able to fund all the services due the Bommers.. However, if the pols let in millions of immigrants get amnesty and suddenly become part of the system then the pols will have found a way to finance the shortfall without having to make the decisions now to rescue the system.. The politicians have squandered our money, but this is a scheme to evade the responsibility for it...

July 17, 2008 at 1:47 pm

Greedom

Yeah, ok I just scrolled back up Where - WHERE is the article here ? On the other hand ? I really look forward to ANY new material on this blog so I can't REALLY complain now can I ! Too much relativity in CPI ! more absolutism ! jk Did I see Sr. Editor there Liz ? did I ? I expect more words ! heh jk - I'm guessing this - it was a problematic day and low staff to otherwise cover - on the other hand you write you own matieral, so, nevermind on that. I'm going to go with should have taken the day off rather then put this up ! and that REALLY is probably the best ! On the other hand that network FBN - does it get profits from the late night ads run on it ? Does everyone get paid from the Food Dehydrator II ? ad revenue ? I wonder. Either way - that's not mainstream corporate lobbyism - but I wouldn't mind if the show's ON the network Trumann Showed it up a bit and started to drop reference to the products themselves. MacDonald: "And yes, as a guest you recieve one of our Black and Decker waffle makers !" OK OK maybe not THAAAYAT blatent. Try this on for subversive advertising "And today, the stocks might have well been on a black and decker workbench - up and down - by noon, the DJIA had everyone out for lunch to get waffles - just dead waters out there people !. Perhaps that's not so transparent as to embedding advertisements into the TV shows themselves I think the master class is "Fear terror, live like there is no tomorrow" and then "hey, want to live in a 500k home with a mortgage that you'd have to really think there IS no tomorrow ? " Call CountryWide now - back to you Geraldo: "Now... Geraldo, exactly how FAR was the telephone booth the runaway bride used from the 7-11 itself" "Well, let me tell you - it looks to be about 14 meters away from the 7-11" "thanks Geraldo, we're out of time" and on and on then CountryWide DiTech you got the greenlight Baby Fox News was the LEADER in pushing these sub prime toxic waste products where am I wrong ? is it me ? am I wrong on this ? I am often wrong. Really. I just intuit this, I recall the CountryWide ads - Myself ? I love the 'you'd have to think there was no tomorrow to borrow like this' is REALLY ? what - CW, but 'you'd have to think there was no tomorrow to lend like this' well - like the article - going to leave this one hanging

July 19, 2008 at 8:25 am

about this blog

  • Elizabeth MacDonald is the stocks editor for Fox Business Network. She is recognized as one of the top prize-winning business journalists in the country, and has received 14 awards, including the top prize in business journalism, the Gerald Loeb Award for Distinguished Business Journalism, and the Newswomen's Club of New York Front Page Award for Excellence in Investigative Journalism.

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