Friday, December 14, 2007

Inflation vs. Unemployment v.2

This is an update to a chart I posted earlier today. It includes the most recent CPI data. You'll really need to read the previous "Inflation vs. Unemployment" link below to have any idea what this chart is supposed to show. It is probably my most complicated chart to date.

I can summarize the results though. The inflation number came out today at 4.3% year over year. We're being dragged kicking and screaming up away from deflation and towards the blue trend line. Meanwhile, unemployment is beginning to creep up too (~4.7%) so we're also being pulled to the right as well. As far as this lagging chart is concerned, both of these two forces are baked-in.

This does not mean that future inflation is guaranteed. This is all just looking in the rear view mirror and hoping to make some sense of it. However, it does support Bernanke's deflation isn't going to happen here mindset. We were clearly diving into the deflationary abyss and bounced (at least in my opinion).

See Also:
Inflation vs. Unemployment
Trend Line Disclaimer

Source Data:
St. Louis Fed: Civilian Unemployment Rate
St. Louis Fed: Consumer Price Index for All Urban Consumers: All Items


Anonymous said...


You have proven that there is no method to the madness. The simple solutions are usually the best.

We should have a policy of no inflation.

Anonymous said...

I still think that Kasmir Petrov has it right. Eventually asset inflation will spill over into cpi stuff.

In other words, measured inflation per the cpi will rise while assets such as stocks, bonds and housing will deflate. I'm not sure how the increase in the inflation component of TIPS will fare against the drop in bond values.

I'm also not sure the majority of Americans have enough money to cause prices to rise here, so perhaps the price increases will come from China.

Stagflationary Mark said...


The simple solutions are usually the best.

Unfortunately, we're now stuck with a complex system that requires complex adjustments lest the whole system collapse.
A comically involved, complicated invention, labboriously contrived to perform a simple operation - Webster's New World Dictionary

We've got the Rube Goldberg financial innovation machine at our disposal. If I had my way it would be in the disposal.

Anonymous said...

I can’t help that thinking in terms of dollars misses the point. Savings means deferred consumption. Let’s pretend we are an agrarian society paid in bushels and also used it as our tradable commodity. For many years we were a growing society that used innovation to make each years harvest more productive. Each year after the harvest people put the store of grain in the community granary and were issued new bushel buckets to make sure no one cheated. After awhile some people learned that they could borrow from future production for homes, household wares, trips abroad etc. and since each year they were more productive the amount they borrowed in the past became more insignificant. The granary owners liked people borrowing because they were owed more grain in the future. However the weather turned and they had several bad harvests in a row. People began to stop borrowing as much which effected the people who were not directly involved in the fields. Since by this time the non farmers were in the majority they began by letting the village elders know their displeasure. One village elder Ben had a bright idea. When we issue the bushel buckets this year we will make them slightly smaller so everyone will feel they have more and they will continue to borrow and spend. It worked like a charm. In fact each year they got more clever at it and were able to determine exactly how far they could push the villages the bushel miniaturization expectations. It even felt like they were having a much more productive economy but in actually they were just emptying the granary. A bushel would not buy what it used to and some people began to cut back because the other necessary items were getting more expensive. Again people began to get laid off but the elders were out of new ideas. To tell people that they had to defer consumption would get them thrown out of their cushy jobs. (They were employed by the people who ran the granary). They began to get more aggressive in the way they manipulated peoples bushels minaturizations expectations and what defined whether a person was really employed. Some people started to save their grain outside of the village granary. The village elders heard of this and passed laws against the hoarders. The hoarders knew that you cannot continue to borrow what you do not produce. However it became unpatriotic not to be in debt and do your part to keep others employed. Others kept borrowing because as long as the granary lent them bushels they were not starving. When the granary finally ran out of food everyone was destroyed except the village elders who had for years setting up residences in another village.

Stagflationary Mark said...

abby normal,

I think you summed up why I think canned goods are a decent store of value these days and why I've joked that our fractional reserve banking system couldn't work if dollars were backed by canned green beans.

How could the banks loan out more than one can of green beans if only one can was deposited? Further, how could they keep a can of green beans for themselves? It sure would be tricky, to say the least.

I'm sure the government would think of something though. If nothing else, perhaps they could endorse "toxic" green bean loans and fine people for trying to eat the currency (much like the recent decision that melting pennies is illegal).

Anonymous said...

Abby N.

Sadly, the vast majority has no concept of the destructive powers working against them.