FLASH UPDATE

November 19, 2008

Annual CPI Inflation Slowed to 3.7% (11.6% SGS) in October

Inflation/Deflation Traditionally Measured in Terms of Annual Change

Industrial Production, Housing Starts Showed Deepening Downturn

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PLEASE NOTE: The updated SGS-Alternate CPI has been posted to the Alternate Data tab at www.shadowstats.com. The next planned Flash Update is for Friday or Saturday, addressing the latest money supply indicators.
– Best wishes to all, John Williams

Consumer Inflation Absorbs Collapsing Oil Prices. Seasonally-adjusted, month-to-month changes in the Consumer Price Index (CPI) rise and fall, as do the monthly changes in the broad measure of the money supply. While a monthly contraction technically is monthly deflation, deflation (as with inflation) in the prices of goods and services generally and traditionally is measured on a year-over-year basis. So measured, annual CPI and broad money growth remain strong, although the rates of growth have slowed recently, and may do so for another month or two, as part of the bottoming process in the current oil-price-drop cycle.

Indeed, October CPI inflation slowed markedly on an annual basis, and contracted sharply on a monthly basis, as falling oil and gasoline prices again were absorbed with heavy impact.  Incredibly, so-called "core" inflation — net of food and energy — also contracted in October by 0.1% for the CPI-U, after showing slowing monthly gains of 0.1% in September, 0.2% in August, and 0.3% in July. Such is despite significant anecdotal evidence of still rising non-energy and food inflation. Also curious in the current full CPI calculation was that normal seasonal patterns — that would have softened the impact of declining gasoline prices — disappeared.

CPI-U.  The Bureau of Labor Statistics (BLS) reported seasonally-adjusted October CPI-U declined by 0.96% (down by 1.01% unadjusted) +/- 0.12% for the month, versus a 0.03% (down by 0.14% unadjusted) easing in September.  Year-to-year or annual inflation in October backed off to 3.66% from 4.94% in September, remaining in strongly positive territory.  

Annual inflation would increase or decrease in November 2008 reporting, dependent on the seasonally-adjusted monthly gain exceeding the 0.90% monthly increase seen in November 2007.  The difference in growth would directly add to or subtract from October’s annual inflation rate of 3.66%.

C-CPI-U.  Year-to-year or annual inflation for the Chain Weighted CPI-U — the fully substitution-based series that increasingly gets touted by CPI opponents and inflation apologists as the replacement for the CPI-U — also softened sharply to 3.28% in October, from 4.34% in September.

Alternate Consumer Inflation Measures.  Adjusted to pre-Clinton (1990) methodology, annual CPI growth eased to roughly 6.9% in October from 8.3% in September, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, dropped back to roughly 11.6% in October from 12.9% in September.  The alternate numbers are not adjusted for any near-term manipulations of the data.

Real Retail Sales. Following up on October retail sales reporting (see last newsletter), real (inflation-adjusted) retail sales fell by 1.79% on a monthly basis, versus a 1.26% contraction in September, based on October’s CPI-U inflation. Annual real retail sales fell by 6.85% in October, versus 6.04% in September, while the annual contractions on a three-month moving-average basis were 5.60% and 4.44%, respectively, in October and September.

PPI Also Took Heavy Oil Hit. The regularly volatile Producer Price Index (PPI) for finished goods contracted by a seasonally-adjusted 2.8% (2.6% unadjusted) in October, versus a 0.4% decline (down 0.1% unadjusted) in September, as reported by the Bureau of Labor Statistics. The monthly drop was dominated by the continued sharp decline in oil prices, as well as unusual seasonal-factor adjustments.  Year-to-year PPI inflation in October slowed to 5.2% from 8.7% in September.

On a monthly basis, seasonally-adjusted October intermediate goods fell by 3.9% (down 1.2% September), crude goods fell by 18.6% (down 7.9% September). Year-to-year inflation slowed or turned negative, with October intermediate goods up by 10.2% (15.4% September) and October crude goods down by 1.4% (up by 26.0% September).

Industrial Production Keeps Tumbling. Despite positive impact from the end of the Boeing strike and diminishing negative effects of the hurricane season, the broad contraction in industrial production has not ended. Although the Federal Reserve reported a 1.3% monthly gain for October, the October index level was unchanged net of revisions — against September’s initial reporting. In revision, September showed a monthly contraction of 3.7% (previously a 2.8% contraction). October year-to-year change was a deep contraction of 4.1%, following a 5.7% annual drop (previously 4.5%) in September. The third-quarter’s quarterly contraction was an annualized 7.6%, against a 3.4% contraction in the second quarter.

Deepening Annual Contraction in Housing Starts. The Census Bureau reported that the level of seasonally-adjusted October housing starts fell by 4.5% (down 3.8% net of revisions) for the month, versus a 3.0% (previously 6.3%) monthly contraction in September. October starts fell by 38.0% year-to-year, deepening against the 30.1% (previously 31.1%) annual contraction reported in the September numbers.

As seen with nearly all industry-specific series of the last month or two, annual and quarterly rates of contraction are deepening, in tandem with a rapidly deteriorating broad economic recession. There are no series, at present, signaling a bottom or any potential turnaround for the current downturn.