Just five months ago, inflation in India seemed to be well under control. On June 11, Bloomberg reported that Indian wholesale prices had increased just 0.13 percent in the last week of May. That was the lowest rate of inflation in 30 years.
The IMF, which in March 2009 projected inflation of just 2% for the fiscal year ending March 2010, now sees inflation at 8.7% for the calendar year of 2009. In October, its Regional Economic Outlook warned: “In India … industrial production is recovering rapidly, and core inflation and inflation expectations are rising.”
India, of course, is the region’s largest and most geopolitically important country. But according to AFP, it’s not just India that has experienced an abrupt increase in inflation. The entire south Asia region is under siege:
In the third quarter of 2009, inflation in South Asia, which aside from the Maldives comprises India, Pakistan, Nepal, Bangladesh, Afghanistan, Sri Lanka and Bhutan, hit an average 10.9 percent, the World Bank said.
The biggest cause: skyrocketing food prices. In India, for example, the price of sugar has increased 45.7 percent from last year. The price of potatoes is up 96.4 percent. The price of onions: up 37.6 percent.
Another cause: rising electricity prices. In Pakistan, a restaurant owner claims his electricity bill has doubled since General Pervez Musharraf was forced to resign just over a year ago.
Not surprisingly, the middle class has noticed. As AFP notes, higher prices for basic staples like food and energy are increasing dissatisfaction with a Pakistani government that had already been unstable:
In a country with huge disparity in wealth, life has always been a struggle for the third of the population that lives below the poverty line but now lower-middle class and professional families find it increasingly difficult to make ends meet.
The rupee has depreciated by 35 percent in the last year while electricity, gas and petrol prices have doubled in the last two. The country faces a crippling energy crisis, producing only 80 percent of its power needs, causing debilitating blackouts and suffocating industry.
Price hikes and shortages of essential items such as sugar and flour complicate housekeeping and exacerbate the rock-bottom unpopularity of President Asif Ali Zardari, head of the Pakistan People’s Party (PPP).
The experience of India, Pakistan, and other south Asian countries offers two helpful reminders. First, when inflation arrives on the scene, it can spiral out of control more quickly than just about anyone expects. Second, inflation is not just an economic problem, but also a political one.
No it’s not your imagination. That roll of toilet paper you just bought really does have fewer sheets than it used to.
WINK News of Southwest Florida reports that consumers good companies are up to their old tricks. Rather than raise prices, they are making their packages smaller and charging buyers the same price. A few products to look out for, according to the WINK News team:
Consumers are noticing, and–surprise!–they aren’t happy. When Mary Hance wrote about shrinking packaging last month for her local newspaper in Rutherford County, Tenn., she got an earful.
I had one man call and tell me that he thinks eggs have gotten smaller with different grading criteria — meaning that today’s large egg is what used to be called an extra large egg and so on. I read online about shrinking packages for everything from dog food to contact solution, canned ice tea, liquid detergent, yogurt and more. Jan Tidwell, of Hermitage, wrote: “Ms. Cheap … you are so right about many things being reduced — especially about a can of tuna. I remember when it use to make 3 or 4 sandwiches, now it barely makes 1 1/2.”
That last reader is correct, by the way: a can of tuna contains less tuna than it used to.
“Yes, these days just about every business is struggling to contain costs,” Hance concludes, “but companies need to be up front about it and let their customers know what they are doing and why they are doing it — instead of trying to slip one over on us.”
The Warwick Beacon reports on rising Medicare Supplemental premiums in Rhode Island: “Even though they’ll get no cost of living increase in their Social Security, senior citizens who buy supplemental health insurance for Medicare will be paying, on average, 4 percent more next year for premiums.”
Dow Jones Newswires: “Swiss Reinsurance Co. Chief Executive Stefan Lippe said Thursday market fundamentals point toward higher prices and that the company is well positioned for the renewal season when next year’s reinsurance contracts are fixed in January.”
Prices in the depressed lumber industry have risen recently, as production has fallen to meet demand and dealers have begun restocking inventories…
The publication reports the recent price of framing lumber was up 9.7 percent from a year ago and the cost of structural panels was 2.6 percent higher.
Dividend Daily reports that a Goldman Sachs analyst expects containerboard prices to increase during the next several months: “The analyst said it expects containerboard prices to jump by $50 per ton by February or March of 2010, higher that a prior outlook for a $40 per-ton increase by April.”
In related news, Georgia-Pacific stated it would raise prices on its linerboard by $50 – $70 per ton last week. In addition, Longview Fibre recently announced a $50 per ton increase. Iggesund Paperboard announced a price increase for its folding boax board products in Europe.
A growing chorus of commentators and analysts argue that home prices are due to fall another 10-20 percent or more.
“Until we start seeing a healthy housing market that can stand on its own, without government props, without distressed properties selling 60% off peak levels – that’s how you know the bottom is in,” says blogger Barry Ritholtz, who believes home prices are “not even close” to the bottom.
Henry Blodget, who blogs at Business Insider, agrees wholeheartedly: “The recovery’s momentum is slowing … and it seems likely that house prices will now resume their fall and drop another 10%-15%.”
In the wake of this week’s Case-Shiller report, many headlines were similarly gloomy about the prospects for continued home price appreciation:
- “Housing prices rise, but not for long”
- “Home prices up – but for how long?”
- “Housing data points to rocky rebound”
- “House of cards: Home prices may be headed back down”
- “Home Prices’ Ascent Slows”
- “Seasonal Bump in Case Shiller Home Price Index Abates”
- “Case-Shiller Home Price Index Up For 5th time, But Cracks Showing”
This follows Meredith Whitney’s prediction last month that U.S. home prices will fall another 25 percent. “There is no doubt that home prices will go down dramatically from here, it’s just a question of when,” she told CNBC.
Granted, the housing market may correct a bit from here, especially in the winter (traditionally a slow period for home sales), but I think the odds of a major retrenchment in prices are very low.
First, the Case-Shiller index is up five months in a row–a sign of substantial strength.
Second, pending home sales are up eight months in a row–the longest streak since measurement began in 2001.
Third, the inventory of new homes at the current sales rate was 6.7 months in October, the lowest since December 2006. As Mark Perry observes, that’s “just slightly above the average inventory of 6.13 months, based on new home sales data going back to 1963.” Perry provides the following chart:
Fourth, the number of new housing starts is at a 50-year low. (At least. Records don’t go back further than 1959.)
Fifth, mortgage rates are at a 38-year low. (At least. Records don’t go back further than 1971.)
Sixth, exuberant demand and limited supply in many post-bubble cities are leading to bidding wars, especially (but not exclusively) for low-end properties. In San Diego, prices are up 14 percent in the past eight months. In Las Vegas, where bidding wars are the norm, buyers are “going crazy.” Some California cities, like Bakersfield, report unsold inventory of just two months. San Diego reportedly has just a 1.5-month supply of low-end homes, despite a steady stream of foreclosures.
Housing bears response that demand will dry up once federal tax credits expire. Moreover, they argue that supply will surge once the much-discussed “shadow inventory” of foreclosures hits the market.
But homebuyer tax credits aren’t going to expire until June 30, 2010. That’s seven months from now. And, let’s be honest, if the housing market is showing significant signs of distress, Congress will not allow the tax credit to lapse. Not in the middle of an election year.
And there is little empirical evidence to support the notion that a tidal wave of foreclosures is about to hit. “From the things I’m seeing, there’s not going to be a wave [of foreclosures] any time soon,” says Sean O’Toole, president of ForeclosureRadar. At least one major lender has dramatically reduced the number of foreclosures it is offering for sale. Fannie Mae has launched a program to rent homes back to borrowers rather than foreclose on them.
Yes, there are a lot of foreclosures in the pipeline — no one disputes that — but these homes will probably hit the market in a steady stream over a period of several years rather than all at once. The process of foreclosure is getting slower, due to clogged courts and borrower-friendly judicial rulings. If demand remains as strong as it has been, expect foreclosures to be promptly snapped up by buyers and prices to continue their upward trajectory.
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Southwestern Electric Power Co. has won regulatory approval for two rate hikes for its Arkansas customers. SWEPCO said Wednesday that a base rate increase in December will raise residential bills by 5 percent, or $3.84 for a customer using 1,000 kilowatt hours per month. A second increase will go into effect upon completion next summer of a 508-megawatt, natural gas-fueled power plant in Shreveport, La. To help pay for the $386 million plant, Arkansas customers will see an increase of 4 1/4 percent, or $3.17 a month for 1,000 kilowatt users. Combined, SWEPCO customers will pay 9.41 percent more for electricity, or $7.01 per month for 1,000 kilowatt users. That comes to $84 per year.
Employing workers will get even more expensive in 2010. The National Association of State Workforce Agencies (NASWA) reports that at least 33 states will raise payroll taxes next year to shore up depleted unemployment insurance funds. Click here for complete story….
The Honolulu Star-Bulletin reports that it’s going to get a little more expensive to live in paradise:
Hawaii consumers, already struggling in a tough economic environment, could see higher prices for groceries and other commodities next year. Matson Navigation Co., the state’s largest ocean shipper, said yesterday it is raising rates for Hawaii service an average of 3.8 percent, with rates increasing $120 per westbound container and $60 per eastbound container, which traditionally has lower volume. In addition, Matson is raising its terminal handling charge by $125 per westbound container and $60 per eastbound container.
The meeting minutes from the Federal Reserve’s Nov 3-4, 2009 meeting show that the inflation hawks (all one or two of them?) expressed concern over the longer-term outlook for inflation:
…some participants noted that the recent rise in the prices of oil and other commodities, as well as increases in import prices stemming from the decline in the foreign exchange value of the dollar, could boost inflation pressures….risks were tilted to the upside over a longer horizon, because of the possibility that inflation expectations could rise as a result of the public’s concerns about extraordinary monetary policy stimulus and large federal budget deficits. Moreover, these participants noted that banks might seek to reduce appreciably their excess reserves as the economy improves by purchasing securities or by easing credit standards and expanding their lending substantially. Such a development, if not offset by Federal Reserve actions, could give additional impetus to spending and, potentially, to actual and expected inflation.
However, colletively, the Fed assigns a very low probability to an eruption of expectations for high inflation:
Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period, including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations. While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks.
The Federal Reserve believes that it stands ready to change monetary policy in response to higher inflation expectations:
“To keep inflation expectations anchored, all participants agreed that it was important for policy to be responsive to changes in the economic outlook and for the Federal Reserve to continue to clearly communicate its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and pace.”
Meanwhile, gold continues to hit all-time highs, record amounts of money continue pouring into commodities of all kinds, and TIPS hit fresh 52-week highs, far out-performing treasury bonds this year. It seems the Federal Reserve may have some catching-up to do…
WSJ: “The S&P/Case-Shiller 20-city home-price index, a closely watched gauge of U.S. home prices, rose 0.3% in September from August in the fifth straight monthly increase….”
Fed officials continue to tell us that inflation is contained, yet the price of gold continues to soar. Here’s the daily chart for streetTRACKS Gold Trust exchange-traded fund (ticker symbol GLD):
Note that GLD has risen in seven out of the last seven trading days.
Reuters reports that a central bank newspaper in China has warned that government stimulus in property markets is overheating asset prices. Click here.
According to USA Today, drivers are “paying higher fees for licenses and vehicle registrations as budget cuts force motor vehicle departments to close offices, furlough employees and scramble for revenue.”
States including California, Nevada, New Jersey, Massachusetts and Colorado have increased fees to help close budget shortfalls. In Massachusetts, driver’s license and vehicle registration renewal fees went up from $40 to $50 in August.
California is raising driver’s license renewal fees by $3 to $31 on Jan. 1, says Department of Motor Vehicles director George Valverde. Registration fees, based on the value of the vehicle, went up in May from a range of $50 to $90 to a range of $80 to $130.
While Congress debates health care reform on Capitol Hill, employers throughout the country are bracing for double-digit or high-single-digit health insurance premium increases.
Colorado employers who responded to Mercer’s National Survey of Employer-Sponsored Health Plans said that if they made no changes to their current plans, their premiums would rise by 9.3 percent. They expect to lower the premium increase to 6.8 percent by making their plans less generous or by switching health insurers.
CantonRep.com reports that health insurance premiums in Stark County, Ohio, are soaring. One local engineering firm says its premiums will rise 25 percent:
The health insurer for Hammontree & Associates told the engineering firm in Green last month that it was raising premiums for 2010 by 40 percent.
The reason: Three or four of the firm’s 45 staffers had filed costly health care claims in the last two years.
Facing an extraordinary strain on its budget, the company negotiated the premium down to a more palatable increase of 25 percent. But under the plan, its employees’ deductibles will more than double — from $1,250 to $2,400 for families, for example.
About 240 miles northeast of Canton, the Buffalo News reports that western New York health insurance companies will be raising health insurance premiums substantially in the coming months:
Buffalo-based HealthNow is forecasting an average rate increase of 10.2 percent across its entire commercial book of business for 2010, before plan changes by employer groups.
Univera, which is owned by Excellus BlueCross BlueShield of Rochester, is projecting an average increase of 6.9 percent, but that’s after groups change plan features to lower their costs.
Independent Health Association, which released rates several weeks ago, said then that its premiums would rise 10.5 percent, before plan changes.
According to the Consumer Price Index reports released by the Bureau of Labor Statistics, used car prices increased 6.1 percent in the four-month period between July 2009 and October 2009 (seasonally-unadjusted figures). Taking into account compounding, that’s an annualized inflation rate of 19.4 percent. Yes, prices will probably pull back a bit in the coming months, but anyone expecting a crash in prices will probably be waiting a long, long time.
Associated Press reports higher fees for Arizona state parks starting in March 2010:
The [state parks] board agreed earlier this month to keep a premium annual pass, which allows full access on weekends at river parks. However, the fee for that pass will increase from $125 to $200 [an increase of 60 percent]. The cost of Arizona’s standard annual entrance pass will go up from $50 to $75 [an increase of 50 percent].
Park fees may soon rise in California, too.
When home prices plunged from 2007 to early 2009, some bloggers noted that the Consumer Price Index had done a lousy job of incorporating the decline. The problem, these bloggers pointed out, was the Bureau of Labor Statistics’ use of “owners’ equivalent rent”–the estimated costs that homeowners would assume if they rented their homes instead of owning them–to represent home prices.
Tim Iacono wrote back in 2007: “OER is one of the poorest proxies the world has ever seen as demonstrated by the comparison below with the Case Shiller Home Price Index.”
Source: Tim Iacono
Andrew Jeffrey made a similar point earlier this year:
The statistical alchemists, err, experts, at the Bureau of Labor Statistics use something called “owners equivalent rent,” OER, to measure consumer housing expenses. OER tries to approximate the cost to rent the country’s typical home, and according to the Wall Street Journal makes up 24% of the CPI and 31% of the core CPI, which backs out food and energy costs.
And since even as property values have slid in record-breaking fashion rents remained buoyant, OER has vastly understated the drop in home prices. This means the CPI–were it to reflect some sort of economic reality–would have fallen more than it actually has.
Of course, times change. Although home prices are still well below their peak, and some observers continue to talk of an ongoing crash in home prices, the housing market has been on the mend since the spring of 2009–at least if you believe the S&P/Case-Shiller Home Price Index. As was the case in 2007-08, there is a discrepancy between the Case-Shiller index and the owners’ equivalent rent component of CPI, but this time the mismatch causes inflation to be under-reported rather than over-reported.
Let’s look at the numbers. Between April 2009 and August 2009 (the latest month available for the Case-Shiller index), the Case-Shiller index rose from 139.2 to 146.0–an increase of 4.9 percent. By comparison, the owners’ equivalent rent component of the CPI rose from 256.6 to 257.2 during the same period–an increase of just 0.2 percent. In other words, the rate of home price inflation was nearly 25 times higher than that shown by the CPI.
The CPI as a whole increased from 213.2 to 215.8 — a rise of just 0.1 percent. But if we replace owners’ equivalent rent with the Case Shiller index, CPI would have increased 2.4 percent during this four-month period–an annualized rate of 7 percent.
For simplicity, these calculations are based on seasonally-unadjusted numbers. The results might be slightly different if they were based on seasonally-adjusted figures, but the basic point would not change, i.e., reported inflation since April 2009 would be much higher if not for the CPI’s use of owners’ equivalent rent.
Admittedly, the picture is very different if one looks at year-over-year inflation. The Case-Shiller index declined 11.3 percent between August 2008 and August 2009, whereas owners’ equivalent rent increased 1.7 percent. So CPI significantly overstates year-over-year housing inflation. This overstatement will gradually get smaller before disappearing entirely in mid-2010, unless housing prices begin to fall again. (Recent reports indicate that housing prices are continuing to rise.)
If inflation expectations remain “contained” why is a record amount of money pouring into commodities this year? Indeed, nothing like a rapidly increasing global supply of paper currency to drive up the prices of hard assets.
“Barclays Capital’s figures showed strong inflows in October continuing into November with total money into commodities year-to-date already approaching a record $55 billion, displacing the previous record of $51 billion in 2006.”
Related link (from writejesse): Commodity reflation recap.