Tuesday, October 4, 2011

Services Inflation

UK Bubble has an interesting post titled Never below two.

The story of UK inflation is straightforward. Cheap manufactured goods from Asia kept the inflation rate low, which the service sector, which can not easily be substituted by foreign competitors just kept raising their prices.

I'm a believer in the theory. There's a chart to look at as well.

I now offer you the American version. First, let's start with the overall CPI.

Click to enlarge.

There's really nothing to see here. All is well. We're pretty much right on trend. Let's turn our attention to the inflation in services.

Click to enlarge.

D'oh! Exponential trend failure! Shocking!

October 4, 2011
Ben Bernanke says “the recovery is close to faltering"

"Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy," Bernanke said. "Fostering healthy growth and job creation is a shared responsibility of all economic policy makers."

In other words, American monetary policy can help drive the price of oil into bubble popping territory to stave off deflation but there can be unintended consequences as it relates to our service economy's job creation prospects. Who knew?

October 4, 2011
Restaurant Performance Index Fell to Lowest Level in 13 Months

Fewer than one in five foodservice operators expect economic conditions to improve in the next six months

Source Data:
St. Louis Fed: CPI
St. Louis Fed: CPI: Services


Stagflationary Mark said...

I just had a subconscious epiphany. I don't often use the term "stave off" and I was wondering what prompted me to use it.

stave off

to delay or postpone something unwanted, such as hunger, foreclosure, death, etc.


Mr Slippery said...

I'm not sure what else the Fed can do, without further impoverishing the poor. I think that's why Ben is trying to push Congress into more fiscal stim. But there is enough opposition to kill most stim in the House and in fact there is a big push for further spending cuts.

The Supercommittee has to identify some more cuts in two months or automatic cuts take over. Global debt is eating us alive and there is no fix without massive write offs (losses for the rich). Good luck with that one. They are happily crushing the Greeks under the debt boot heel - the fate of us all I am afraid until a hole is blown in our culture.

Stagflationary Mark said...

Mr Slippery,

I think the answer comes from Fisher. The Fed has done about all it can do.

October 3, 2011
More Fed easing could do harm, hawks say

Fisher said he was mainly worried that the policy would not work as advertised.


This is how a service economy slides into deflationary Japan.

If you inflate too much, the price of oil chokes the economy. If you inflate too much, long-term interest rates would rise and choke the economy.

The optimal can kicking environment is to simply follow Japan into its stagnationary mess. Let deflation keep interest rates near zero so that you can borrow nearly infinite amounts of money.

In theory, this could go on forever (or at least as long as I am alive). Just picture deflationary pressures that never stop. For what it is worth, I do not see what will stop them if China crashes (which I think will happen) and we continue to automate jobs.

It's a horrible investing environment though for those expecting growth to fuel our future (commodity investors included in theory).

Economy of Japan

Japan's service sector accounts for about three-quarters of its total economic output.


I don't think it is simply a coincidence that Japan's inflation rate has averaged 0% for decades. I think it is by design and it could very well be our design too at some point.

Stagflationary Mark said...

It's just a theory of course.

Mr Slippery said...

The problem with Japan is that some day they will not be able to pay the interest on their debt, even at 0.5%. Then what? The BOJ prints yen to directly fund the government plus interest and their debt goes to infinity and beyond?

Stagflationary Mark said...

Mr Slippery,

The problem with Japan is that some day they will not be able to pay the interest on their debt, even at 0.5%. Then what?


September 6, 2007
Let Them Eat Cake!

In 2000, then-BOJ Governor Masaru Hayami was widely derided for raising rates from zero to 0.25 percent. Pundits called him Japan's answer to Herbert Hoover. Yet Hayami was trying to force Japan Inc. to implement structural reforms. It didn't work and rates returned to zero in March 2001. - William Pesek

nanute said...

You said: Let deflation keep interest rates near zero so that you can borrow nearly infinite amounts of money. I don't think that is right. If deflation is in play it will in effect make the real rate of interest higher. No?I thought that inflation would erode the value of real rates of interest.

Stagflationary Mark said...


I'm talking about Japanese style deflation (which has actually just been a 0% inflation rate) and nominal interest rates of 0%. I should have been more clear. That would put real interest rates at 0%.