Gasoline prices have been falling like crazy in June. Gas is already down $.14 in June. You can see the remarkably straight line decline – it’s about 2 cents every 3 days.
Here at Crucible headquarters, we can do simple math. I assumed 10 more days of price declines at the same rate, which would shave another 6 cents off the price of gasoline, for a total of $.20 of declines. That’s 5.2% decrease in the price of gasoline.
Then I went over to the macroblog at the fed, and used their handy guide to how to calculate CPI given a few prices. I then pushed this into a spreadsheet, using the same assumptions as David Altig did at his Atlanta Fed blog.
It turns out that if gas declines another 6 cents, headline CPI will be 2.3%. Thats down 1.3% from May! Then if we see a bit of spillover from lower energy prices into lower food costs – say for example if corn loses ethanol subsidies and drops 20% or something like that – we could see an extended period of lower CPI.
Received this in my comments section. I had to spam it. I took broke the http so it won’t link to the ad.
The hoax is everywhere.
It’s a never ending battle against the forces of willful ignorance over here at the Trader’s Crucible. We now have Soc Gen and The Business Insider warning about how we will be facing huge inflation from China.
One thing you’ll notice in many of these hyperinflation hyperventilation pieces is a distinct lack of math. Yes, the story sounds good – China and India are growing rapidly – but the math does not support the story that there is an ocean of inflation that will swamp the U.S. The numbers do not support this narrative at all.
The math is simple: Take the total amount of inflation in the U.S. and China, and then divvy it up anyway you like. The total amount of inflation will remain nearly the same no matter who gets it. If you want 0% inflation in China and see what happens to inflation in the U.S., you can do this with math.
Note that the total size of the combined Chinese and U.S. economies is huge. Some of the inflation that China is experiencing must be allocated to China as well.
I wrote a whole post on what to do and how to do it. It is not hard work and requires nothing more than a few spreadsheet calculations. I used extremely aggressive assumptions about inflation for China at 10% in my calculations. But even using this very high 10% figure, there isn’t that much inflation in the world. Unless something fundamentally changes, the U.S. does not face a huge inflation threat from China.
Government Budget Constraint: I think we put this old horse down. [Update: More here. We cannot tell ex ante if we are violating or holding to the no Ponzi assumption with any certainty. Any violation is and can only be ex post knowledge. We can only act on what we can see today, which is probably inflation and the treasury yield curve. If you think there are unobservable factors and risks, well, how can we know what they are and what should we do about them today besides pray to the gods? If you want to take rational action, you need to act on the observables.]
Solvency vs. Debasement: We Cannot Become Insolvent. We Can Debase the Currency. Even Bill Gross – head of Pimco and the largest bond trader in the world – admits it now.
The TC rule: A simple rule that gives a target budget deficit. It will probably be linked to a floating tax holiday. Needs work – and I have a post/update brewing, but it isn’t all bad as it stands today!
The Meta-Critique: Can we know this information before we make the decision? We cannot make decisions using information we do not know ex ante. Can we know this information at all? I am seeing this pop up over at Matt Rognlie’s place.
Anti-Democratic Conspiracy in Economics: I’ll have more to say on this, but it is everywhere.
We live in bubble land: We live in a world where the economy demands credit bubbles. Mr. Rowe disagrees with my interpretation. but I suspect that real rates, and not an unobservable, unknowable natural rate(ex ante and ex post – thanks JKH!), will prove to be the cause of this.
Shadow stats and the Hyperinflation Hoax: Gaining Traction here too. The myth that we have high inflation right now, but the government won’t report it, is surprisingly common.
Crushing Austrian critiques of MMT: It’s obvious how to do it. Looking at the comments section at The Pragmatic Capitalist (Cullen is doing gods work over there) and Mises.org reminds me how hard it is to think scientifically. Some people – smart, educated, talented, productive people – can miss the subtle differences of scientific vs. logical thought, and there is little we can do to remove the scales from their eyes.
Great news! TC is now on the first page of Google results for “shadow government statistics”! for the post Why Shadow Government Statistics is very, very, very Wrong. One of the major ways people reach this blog is through a variety of searches for “shadow stats”, “shadow statistics” and such. It is great to see this on the first page of results.
We do not have hyperinflation. People that say we do have Hyperinflation are either deluded, or not being truthful with you. Hyperinflation in the U.S. on May 9th, 2011, is a cruel hoax. Inflation is about 2-3% at this time.
Remember that post about the futility of using monetary policy to impact the price of oil? It turns out that the elasticity of oil is even lower than I thought! The IMF – ok, no jokes – came out with a report showing the short term price elasticity is nearly irrelevant, while the long term price elasticity is freakishly tiny. The Blog world is a-titter about this.
The IMF says that a 10% increase in the price of oil results in 0.007% less demand in the short term.
The U.S. uses about 15 million barrels a day. A 10% increase in the price of oil results in – wait for it – a decrease of 1050 barrels of oil per day. Increasing the price of oil from $90 to $99 results in 1000 less barrels of oil demanded. That is 1 futures contract at the CME/NYMEX. A 1 lot. To put this in perspective, 319,000 contracts traded yesterday.
What level of interest rates – in the standard model- could be high enough to push down oil prices 20% or so, back to$90 a barrel? The demand for oil will not change in the slightest even if rates were increased to 5% tomorrow. People won’t say “Oh, this quarter point increase in the Fed Funds rate makes me want to use less gasoline – or at least pay a lower price for it.” A 10% increase in the actual price impacts demand by an amount so small it is a rounding error. Tiny movements in interest rates will have zero observable impact on the price we are willing to pay for gasoline.
A self-inflicted cure of higher rates in response to high oil prices would be far worse than the disease. We know what it takes to get the price of oil down to $40 a barrel. It takes a global depression. It takes losing 500,000+ jobs a month in the U.S.
This is another reason to fight the Hyperinflation Hoax.
[Update: I made a mistake in oil demand. The actual numbers are a 10% increase in the price of oil causes a drop of .2% in demand after 20 years.
This translates to a decrease of demand of about 30,000 barrels a day. It does take 20 years for this to happen. So if we assume a linear drop, then it's a drop of about 125 barrels/day a month, every month for 20 years. This is still very small. I wonder how this number is significantly different than zero - it seems impossible that such a small effect would have an error term that's even smaller, considering the data used. ]