The headline's scary as all get-out: "Jump in Wholesale Prices Shows That Inflation Remains High." No way that interest rates would be going down on that. No way we should be thinking of anything but a tightening by the Fed.
But neither is the case. Rates are going down. The Fed's not going to do anything, it is scared of its own shadow and is -- as usual -- paralyzed about the big issue of the day, house price depreciation.
Which brings me to the index itself, the one that "soared" the worst in 27 years.
If one breaks down the components that screamed higher, you will understand why inflation has not only peaked but is coming down hard.
First, the big issue, before we even get to the index, the most important component in inflation isn't included in the index -- home prices. We have seen double-digit declines throughout the country and 30% to 40% declines in the big population growth areas. That they aren't included in this index or the consumer price index means that the index is a bit of a canard. If the largest and most important asset you want to buy is down big year over year, how can inflation be soaring? How?
Now, to the components:
The biggest change year over year is in iron ore and scrap steel, up 110% year over year and up 5.2% from June. The best forward indicator of scrap is the biggest scrap steel: Sims (SMS) went from $40 when this index was compiled to $26 today. The stock is even with last year. That's a 35% decline from when this number was created, and it is flat year over year.
The next, crude petroleum, is again a big decline. The price of crude had doubled year over year; now it is up a little more than 50%, but the month to month is incredible, down more than 25%.
Even bigger is the next component, natural gas. It was up 87% year over year, and up 7.8% from June 2008. Now it is down almost 50% from June and is flat year over year.
Now the next three biggies -- soybeans, corn and milk and rice -- are up 84%, 80% and 94% year over year but down month to month. And as Richard Bond, CEO of tsn says, more than half of those gains are ethanol mandate and ethanol mandate-related (farmers switching to corn because of the subsidies, driving up the other grains because of scarcity of planting). Scrap the mandate, and you'd crater these year over year. Shortening and cooking oil, up 56.5% year over year and up slightly for the month to month, would be down very big without the mandate.
Finally, home heating oil is up 80% year over year, but as the Spectra Energy (SE) CEO said recently, the switching from oil to natural gas is in earnest because of this increase, and 63% of homes are already heated by natural gas.
If you add all of these up, you are going to see a collapse of commodity prices of epic proportions.
Which is why the numbers are dead wrong about the future. If they are extrapolated to today, the Fed can declare inflation victory and cut rates. It's a gigantic difference.
Now, factor in the cost of wages, which are going to be down year over year because of unemployment, and you get a defined deflationary scenario, that would make rate cuts not only possible but probable.
So I dismiss the headlines on inflation. After you see these raw components, I hope you agree.