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Here's my take on the CPI. It might explain why TIP underperformed IEF and TLT today.
Consumer Price Index Summary
Look at the details in Table A. This is the seasonally adjusted data. It makes it easier to see what's really going on out there.
The drivers of inflation for the month were mostly energy.
The energy index rose 2.8 percent in January, its ninth consecutive increase.
Oil was just under $80 a barrel when I sold TIP in November. It's just under $80 a barrel now. There's at least a chance that the energy index will stop going up at such a rapid rate.
The drivers of deflation for the month were mostly shelter. Shelter is a good chunk of the overall CPI.
The shelter index declined 0.5 percent. The index for lodging away from home fell 2.1 percent, while the rent index was unchanged and the index for owners' equivalent rent declined 0.1 percent.
Here's the entire list of months since 2000 that had declines in shelter from the previous month.
9/2005: -0.1%
7/2009: -0.1%
11/2009: -0.2%
1/2010: -0.5%
There were only 4 declines in the 109 months of the period. 2 of the 4 declines were in the last 3 months.
Even though we all know the housing market crashed, the shelter part of the deflation story didn't begin until October of 2009. The seasonally adjusted shelter index peaked at 249.644 at that point. It now sits at 248.029. That's a 0.65% decline.
There's no telling how much further the shelter index will decline.
Final Look at Local Housing Markets in October and a Look Ahead to November
Sales
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Today, in the Calculated Risk Real Estate Newsletter: Final Look at Local
Housing Markets in October and a Look Ahead to November Sales
A brief excerpt:
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2 hours ago
23 comments:
Angry Bear is encouraged by the lack of inflation.
http://tinyurl.com/yf6qqqh
I'm with Mish on this one though. A lack of inflation is also known as deflation.
http://tinyurl.com/ydortj4
Mark,
rents are headed down for some time. Also hotel room rates, the "stay away from home" number have been getting pummeled for a while. The Mess That Greenspan Made covers an anomoly in the math that may have overstated that component and thus the CPI is too low and may be revised. We shall see.
In any case I expect should home prices nudge up they will change the CPI housing component to include home prices and not rents to avoid these deflationary numbers. 10 trillion (who knows really?) and this is all the reflating that we can get. Maybe we should quit while we are ahead.
Don't bother responding, I already know what you will say because I know what I think. LOL.
I have a new reason to be skeptical about CPI data and possible fraudulent reporting of said data.
I recently learned about uses of CPI data that I never knew existed, including HOA (Home Owners Assoc.) fees and revenue bond debt service.
Should amenity facilities and services operating expenses grow larger than projected and there is no concomitant increase in the CPI which would allow for the necessary increase in amenity fees, the scheduled bond debt service MUST be paid.
So, if funds available after bond debt service has been paid are not sufficient to maintain facilities and services at the same or higher level as they were when the HOA took control then what's left is a situation where class action lawsuits and such are most likely recourses.
I still believe that this very scenario is looming over literally 100's of communities in Florida (and possibly/probably in Cali and Nevada and Ariz.)
If states ain't got the money for "bailouts" in case of a big decline in CPI, what's the next best thing? CPI FRAUD!
- skeptical
GYSC,
I'll bother. You know me! ;)
"In any case I expect should home prices nudge up they will change the CPI housing component to include home prices and not rents to avoid these deflationary numbers."
I would take that bet. I think the odds of them changing it to show more inflation are extremely close to nil.
I do admire your contrarian take on it though. Most conspiracy theories involving the CPI has the government trying to force the CPI down, not up.
I also pray that you are right, since I hold TIPS. I'd love to be proven wrong.
http://www.nytimes.com/2005/06/26/business/yourmoney/26view.html?ex=1277438400&en=a2f81e2f687108da&ei=5090&partner=rssuserland&emc=rss
CONVERSELY, when housing prices fall, a trend that most people would deem anti-inflationary, and renting becomes more attractive than owning, the index might process the information as evidence that inflation is on the rise. "We got a great deal of criticism that we were overstating inflation in the early 1990's, because housing prices were declining and rents were going up steadily," Mr. Jackman said.
Nothing changed then. I can't see why they'd change it now.
Also consider this.
http://goliath.ecnext.com/coms2/gi_0199-6421475/Comparing-U-S-and-European.html
To date, the Europeans have not been able to agree on how to measure owner-occupied housing costs. Consequently, they have simply ruled all owner expenses (except for minor repairs and maintenance) entirely out of the scope of the HICP.
Well, isn't that handy.
G.H.,
Don't even get me started on HOA dues.
I can say how my HOA dues have risen faster than one would expect, and I would not expect said increases to be included in the CPI.
A few years ago, at the height of the bubble, our development decided it was worth the money to get lawyers involved so that we could actively enforce the rules. Lawyers are certainly not cheap.
You see, we were all clearly rich and our properties were therefore special. We needed more rules in order to keep them special clearly.
The new rules came complete with fines, from barking dogs, to weeds in yards, to garbage cans not pulled in within 24 hours, and so on. It seems many neighbors had many complaints about many neighbors.
A lot of money was spent on pretty much nothing. Using hedonics, the quality of my life most certainly did not improve.
I did get a threatening letter pointing out the fines. It was spring and apparently I was not weeding the yard fast enough for some. The neighbor's house was somehow exempt though. They had a new baby. The house up the street was also exempt. They had a recent fire. One of my neighbors actually told me that he hoped I would fight it in court. Seriously.
I'm easily guilted into things. It did not take lawyers. All it would have taken was someone saying, "Hey, would you mind weeding? That bothers me."
When my house was only half the price, nobody seemed to care. My yard was in much worse shape in past years. Whatever!
Mark,
the government wants inflation but only a certain amount. They are terrified of deflation. Rents will fall and so will home prices I expect and so they will find a way, or just do the math wrong like Tim has found!
PS,
you have to see these silver products I saw yesterday, I will post them in a bit!
GYSC,
"PS,
you have to see these silver products I saw yesterday, I will post them in a bit!"
I'm game. Did you see these?
http://www.hooker-earrings.com/vscart/proddetail.asp?prod=204-2
$240 gets you "hooker earrings" in sterling silver. ;)
I tease, therefore I am!
Just like triumph the dog, "I kid, I kid" LOL.
You will be sure of a silver bubble when you see what I posted!!!!
GYSC,
That's very amusing. I think it beats hooker earrings! :)
I agree, but we knew that.
Stag,
"I can say how my HOA dues have risen faster than one would expect, and I would not expect said increases to be included in the CPI."
I think we're out of synch here. I meant that HOA fees/dues can be increased based upon increases of the CPI, not that HOA fees were incorporated into CPI (if I mis-read your read, nevermind ;)
Where it really gets interesting is: What happens when the fees/dues don't pay the bills/debt and CPI is decreasing so traditional increases in fees/dues are not applicable? Defaults of developments, massively increased fees, lawsuits, lower property values, or all of the above.
My "village" is 2500 homes and I am reasonably certain the percentage of those who know the rules is high, 90%+. Compliance, now that's a different animal. But I can't complain, we're doing pretty good so far and the community started in 1984 and finished build-out in 2006/7. There were attempts at flipping from '05 into '06. Most got caught out but it hasn't turned into a disaster of foreclosures because the flippers are residents of the community, LOL, and now they must carry the load in order to not disgrace themselves where they live, LOL again.
BTW, virtually everyone who bought after 2004 is "underwater." I quoted that because many of them paid cash, but still, it'll be a decade before they could break even IMO. I bought in 2001 and I truly believe that when including costs of upgrades and improvements if I HAD TO SELL today I'd come out only single digit gains, maybe (and I'm golf front with a lake on the other side of the course!)
And that ain't cool. But I don't have to sell either and I like where I'm living.
There is one more thing I want to add about "...who bought after 2004 is "underwater.""
The number would be closer to 2001 if not 2000 had it not been for the .gov manipulation of the asset prices since late 2008.
In effect, what I'm saying is that if we had experienced a TRUE correction, and not one based upon confiscation of taxpayer $$, I myself may very well be "underwater" even though I paid cash for my home IN 2001!
G.H.,
We were out of synch. I see where you are coming from now.
As a side note, I still enjoyed the opportunity to rant about my HOA dues though, lol.
There's no end to the fun with HOA dues. Check this out.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/09/04/CM56197PO6.DTL
"I've noticed a number of buildings where the HOA dues are disproportionately high compared to the purchase price of the units because so many owners have defaulted on their HOA dues," she says, and adds: "If the delinquency rate for the building is greater than 15 percent, most lenders won't even finance (it)."
Now that would, pardon my language, suck.
Stag,
Well, you're right about one thing - there's no end to the fun!! And indeed, our proverbial kite has taken a nosedive.
The title of that article says it all.
"Buyers Market" MYASS!
"Many of the entry-level buyers these units were targeted at don't have 10 or 20 percent down payments."
Ya' think? Since about 2004 I don't remember ANY buyers having 10+% down!
Recently, a smaller unit (two-bedroom, two-bath, 1,100 square feet) on the seventh floor of the second tower went into contract in the mid-$700,000s.
?!?! You don't have to remind me to NEVER look for RE in SanFran.
BTW, do you remember MYASS?
The
(M)illenium
(Y)ear
(A)gregated
(S)oftware
(S)ystem!!
That was truly one of the funniest things floating around the 'net circa late '99.
Is there really a place in San Francisco called "South Beach"?
CPI is a red herring.
My personal inflation over the last 10 years has been over 6%.
Yes, interest rates have been coming down and this has helped keep monthly payments stable but if you have no debt and have been paying cash, prices have been going up at more than 2% per year.
A lot of expenses in our monthly budget, which have more than doubled, don't make it in the CPI.
Whatever.
A couple of years ago, my spouse and I played around with our budget to see how much fat could be trimmed.
Interestingly, all the fat was in stuff that had been coming down in price... the discretionary stuff. And the impact of cutting there was minimal.
All the stuff that was impossible to cut, unless we moved in the other side of the tracks and changed social class, had been going up at more than 2x the published CPI.
So I kind of laugh at the hedonism, massaging and substitution that goes into CPI... as if people will lower their standards on a daily basis.
My take on the current situation:
1. Am I part of the top 1%? No.
2. Am I part of the 10%? Yes.
3. Will I stay there? Probably. As long as I have top 10% needed skills.
4. Am I safe? No
3. Why? Because the top 1% now only has the top 10% left to squeeze
4. What can I do financially to secure my financial future? Not much because moral hazard is now rampant. Anything could happen.
5. What can I do psychologically to secure my future? Accept that my current lifestyle could drop by 90%. IMO, that's going to be the big difference between those who are prepared and those who aren't. Those who aren't will be bitter and angry. And it's hard to pick up the pieces and see opportunities when you are in that state of mind.
Moneta,
My personal inflation over the last 10 years has been a lot lower than 6%. I track every penny.
Here's the math on one of the worst offenders. There's been an energy bull market so clearly my energy costs are going to be painful.
In January 2000 I bought 800 KwH for $47.50 and 171.8 therms of natural gas for $102.44. In January 2010 I bought 1124 KwH for $104.32 and 93.06 therms for $103.58.
That's a 56% increase over 10 years for electricity, or 4.6% per year. That's an 87% increase over 10 years for natural gas, or 6.4% per year. I've therefore seen overall household energy costs go up roughly 5.5% per year.
Those are among the highest increases in my expenses over the last 10 years though. There are other places where prices haven't even gone up at all.
Here's what the government claims my home energy costs have done over the last 10 years.
In January 2000 the Household Energy Index was 115.6. In January 2010 the Household Energy Index was 188.982.
That's a 63% increase. It's 5% per year and is between my electricity costs and my natural gas costs. It's fairly close to what I'm seeing. It's a bit light, but then again I'm not a renter using electricity to heat my apartment. My costs have gone up more than their costs.
The CPI overall is up 29% over the last 10 years, or 2.5% per year. That's pretty much what I'm seeing too.
I'm not saying you are wrong. I'm simply saying what I am seeing. As I have said before, one person's tame inflation can easily be another person's nightmare inflation, especially for college students paying exponentially increasing tuition costs. Smokers have really been hit. They've seen 7.8% increases per year over the last decade. Ouch.
G.H.,
BTW, do you remember MYASS?
My favorite was always ASSUME.
It makes an "ass" out of "u" and "me". ;)
I think there's a bubble forming in assume right now. It's probably just in the early stages though.
http://www.google.com/trends?q=%22assume%22&ctab=0&geo=all&date=all
As I have said before, one person's tame inflation
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That's exactly my point. If you've been taking on debt (most people), you have not seen much inflation because declining interest expense compensates for higher prices.
If you have been paying cash, prices have gone up by more than 2%. For a while it was fine because you could just finance your purchase and put your cash in the markets for better than 2% returns but for a while now, inflation has been here.... If your annual expenses are going up and your portfolio is going up 2% instead of 6-8% per year, that's HUGE inflation in my mind. That means my purchasing power is dwindling like crazy.
Another trait of human nature that central bankers don't get in my opinion is the mind of the financially conservative individual.
A few years ago when one could average 6-8% on his/her total portfolio, my spouse and I determined that we HAD to save anywhere between 5K and 20K annually to fund our target retirement (we're open to many different lifestyles)
Now with zirp, and QE, the sky's the limit. It could be 20K, or 40K or 80K, never enough... So while a few years ago we were spending nicely, now the purse strings are closed tight. And with QE, I actually have entertained thoughts of voluntary simplicity just to fight the system.
Something tells me that this zirp policy is pushing a lot of savers like me to save even more and only the reckless are left to spend even more. And I'm fast approaching the point where I would be ready to go off my traditional utility curve to make a point.
My values are radically changing and quicky:
- age acceptance vs. clinging to youth
- letting go of the move up standards of society
- questioning the entire education system for my kids
- letting go of the cult of perfectionism
Something tells me that the quicker the bailouts keep on coming, the faster the social values and mood will change.
I gives a new meaning to moral hazard.
Or maybe I'm just an oddball.
Moneta,
I don't have any debt, not even a mortgage. Very few of my expenses have gone up a 6% pace over the last 10 years.
I'm just not seeing the inflation you are seeing.
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