Friday, October 14, 2005
Someone once said that what the world really needs is a one-handed economist. The reason for this pithy statement is because economists are famous for making grand prognostication and then saying, on the other hand such and such could happen, which would give us a completely different outcome. Tomorrow's headlines in your local newspaper will make the case that economists keep their two-handed approach. The headline will read, "Inflation at 25 Year High." It will be true, but "on the other hand" it will not be meaningful. The 1.2% jump in the consumer price index was almost entirely caused by the surge in energy prices during and after the two storms. The core CPI rate, which excludes food and energy and is the measure of inflation that the Federal Reserve believes is most important, rose only .1%. So take your pick; either we have annual inflation of 14.4% (the 1.2% is a monthly figure) or 1.2%. My belief is that inflation is much closer to 1.2% than it is the former. I can assure you that the main stream media will get this so wrong that I will be countering their ignorance of this issue for many months to come. So now in addition to monitoring dividends hikes and economic growth, I will be commenting on the real rate of inflation on a regular basis for a while. This blog is supposed to be about dividends, but we will have to do battle with the forces of dis-information and confusion before the quiet voice of dividends can be heard at all. At .1% the core rate was actually less than the estimates. The core rate of inflation is so important because it shows the rate of inflation in the 85% of the economy apart from the very volatile food and energy sectors, and, thus, measures the spill over of high energy prices into the rest of the economy. The "one-handed" answer to how much spill over there has been is -- not much. Over the past year, the core CPI has grown by under 2%, while the CPI including food and energy, has grown at near 4%. If I am correct in my belief that oil prices will cool down as a result of sticker shock at the gasoline pumps, then the Consumer Price Index should begin trending lower in 2006. I realize this flies in the face of the headlines in your favorite news source, but to me it is almost baked in the cake.