Wednesday, May 14, 2014

A Prediction We Can Track

People, including me, are apt to make statements that sound "predictive" but are filled with clauses, caveats, and conditions.  In looking at today's Producer Price Index (PPI), food, which is not part of the core inflation measure, is up significantly.  Denninger offers his thoughts on this:

The intermdiate trend in foods is bad news; that is a monthly change.  Energy has been the counterbalance the last two months on an intermediate term, and has kept things in check, and "less foods and energy" has been reasonably-behaved -- right up until this year.  Now it's looking less-so.  But the alarm bells are not there, they're in the forward trend on the crude side.

Here's the problem -- we're several percent ahead of last year's rate at this time of the year.  Spring into early summer tends to have a PPI increase in crude goods.  But if that spread continues we're going to have a major problem coming into the fall as this works through the system, and given unit labor costs and productivity numbers (both going the wrong way too) there is no ability to absorb it.

Keep in mind that Denninger, unlike me, has never advocated the idea of runaway inflation or hyperinflation.  He has held that the Fed monetary policy would eventually reach a point where QE and ZIRP stop because they are doing no good.  As far as it goes, that's already happened.  We are in Japanese-style stagnation, more or less, right now.  When actual inflation in essentials -- you know, like food -- kicks in, our stagnant economy cannot deal with it. 

This leads KD to make a prediction with no qualifiers:

But before you ring the "heh Denninger has turned into an inflationist!" bell let me put one final dollop of cold water on your insanity -- no, I have not.  There is no ability in the economy to absorb such price increases as productivity and unit labor cost figures have shown.  Instead, what this will produce is recession -- deep recession.

That "flat" GDP print is going to be revised to negative, and we're now odds-on to print negative for second quarter too.

That's the formal definition folks.

I think he reasonable in drawing this conclusion.  If food prices start putting pressure on a family's budget, they are going to -- generally -- cut back on other consumer purchases, including services.  Restaurant prices are heading up, so people might eat out less.  They might skip buying new clothes or new electronics or a new car.  In a consumer-driven economy, when people stop buying, it means recession.

Is Denninger right or wrong?  Bookmark his post and look at it around September.

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