Inflation Fantasy

Real Retail Sales Contracted an Annualized 4.2% in First Quarter

First-Quarter GDP Contraction Locked In?

 __________

 Please Note: The SGS-Alternate CPI will be updated later today on the Alternate Data tab at www.shadowstats.com, as will be the Inflation Calculator.
–Best wishes to all, John Williams 

Production, Retail Sales, Housing and Trade Deficit Indicate First-Quarter GDP Contraction

Despite today’s understated March inflation rate, inflation-adjusted, first-quarter 2008 retail sales fell at an annualized quarterly rate of 4.2%, following a 1.3% contraction in the fourth quarter, and a 0.9% gain in the third quarter. Other reporting today showed a 0.1% annualized quarterly contraction in first-quarter industrial production (down 0.5% in manufacturing production) and a 34.5% annualized contraction in first-quarter housing starts (versus a 38.6% annualized contraction in the fourth quarter). With the February trade deficit also indicating likely deterioration for the first quarter, it should be difficult for the Bureau of Economic Analysis to avoid reporting a quarterly contraction in real (inflation-adjusted) first-quarter GDP. Nonetheless, prior GDP fantasies put out by the Bureau of Economic Analysis have been almost as creative as those used in the current CPI underreporting. Indeed, the Administration has the wherewithal to fabricate GDP growth, if it so chooses. The "advance" estimate of first-quarter GDP growth is due out on April 30th. 

On the inflation front, with oil prices still pushing to record highs, with food supply crises spiking food prices, with the dollar still near its all-time low, and with annual M3 growth at an all-time high, the prospects for a let-up in actual inflation pressures, due to recession (already felt) or otherwise, remain close to nil.

CPI Nonsense. Once again, energy and food costs in the CPI were held artificially low against common experience. With seasonally-adjusted gasoline prices reported up just 1.3% in March, following a 2.0% contraction in February, the new numbers did not even offset the prior month’s understatement, per the Bureau of Labor Statistics (BLS). Food prices reportedly gained just 0.2% in March, following February’s 0.4% increase. Again, even allowing for problems with the BLS’s current reporting methodologies, reported inflation is moving away from common experience at an accelerating pace. In like manner, the ongoing apparent inability of energy costs to impact the reported "core" inflation numbers belies common sense and common experience.

The patterns of underreported non-core inflation again were consistent with the March retail sales report (see Flash Update of April 14th). Nonetheless, real retail sales contracted on a monthly, quarterly and annual basis, per the official inflation accounting.

As gimmicked, the BLS reported that the seasonally-adjusted March CPI-U was up by 0.34% (0.87% unadjusted) +/- 0.12%, versus the "virtually unchanged" gain of 0.03% (up 0.29% unadjusted) in February. March’s annual CPI inflation eased minimally to 3.98%, from February’s 4.03%.

Year-to-year annual inflation would resume its upturn in April 2008 reporting, dependent on the seasonally-adjusted monthly gain exceeding the 0.32% monthly increase seen in April 2007. The difference would directly add to or subtract from March’s annual inflation rate of 3.98%.

Annual inflation for the Chain Weighted CPI-U (C-CPI-U) — the substitution-based series that increasingly gets touted by the manipulators and inflation apologists as the replacement for the CPI-U — was up by 3.55% in March, off February’s 3.69% annual inflation pace.

Adjusted to pre-Clinton (1990) methodology, annual CPI growth held at about 7.3% in March, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, held at roughly 11.6%. The alternate numbers are not adjusted for near-term political manipulations of the data.

PPI Inflation Also Remains Understated. The seasonally-adjusted March finished goods Producer Price Index (PPI) reportedly rose by 1.1% (1.9% unadjusted), versus February’s 0.3% (0.2% unadjusted) gain. Annual PPI inflation for March was 6.9%, up from 6.4% in February. Seasonally-adjusted intermediate and crude goods in March rose by 2.3% and 8.0% for the month, respectively, versus February’s 0.8% and 3.7% increases. As with the CPI, the impact of food and energy costs, by themselves, and as felt throughout broad segments of economic activity, remain seriously underreported.

Housing Starts Weaken. The Census Bureau reported that seasonally-adjusted March new home sales fell by 11.6% (11.1% net of revisions) for the month, down 36.5% year-to-year, versus a revised 0.7% (was 0.6%) monthly decline in February, and a revised annual drop of 27.7% (was 28.4%). With first-quarter starts down at an annualized 34.5%, the industry remains in severe contraction.

Industrial Production Contracts in First Quarter. After a benchmark revision that lowered historic production levels, seasonally-adjusted first-quarter 2008 industrial production contracted at an annualized 0.1% after a revamped 0.4% gain (previously a contraction) in fourth-quarter 2007. Manufacturing production fell at an annualized 0.5% in both quarters. Seasonally-adjusted March industrial production gained 0.3% for the month, after a 0.7% decline in February, with annual production up 1.6% from the year before, versus a 1.1% annual gain in February. The series is showing unusual volatility tied to weather and possibly to systemic support manipulations.

The various economic data will be reported on more fully in the upcoming mid-April newsletter.

 __________

Continuing market turmoil, central-bank/government intervention and systemic shocks remain within the general outlook, which is unchanged.

Publication of the next regular newsletter is targeted for around Monday, April 21st, with intervening Flash Updates and Alerts posted as needed. All postings will be advised by e-mail.