UPCOMING CPI NUMBER MAY HAVE A CRUDE REALITY
WALL Street has been feasting lately on news that the speculative bubble in crude oil is deflating. This Thursday, inflation could bite back.
The July consumer price index (CPI) will be released before the stock market opens, and all the good news we’ve been getting about declining oil and gasoline prices could be missing.
Back in May a top economist working on the CPI explained in this column that energy inflation had been under-reported during the spring because of seasonal adjustments that are automatically made to the statistics.
These adjustments, said economist Pat Jackman, were going to be reversed starting in June. “We are going to show huge increases,” I quoted Jackman as saying back then.
“If gas prices are stable from May forward, we are going to end up showing roughly a 16.3 percent increase (for the period) between May and December.”
Jackman’s prediction came true in June’s numbers, when consumer prices rose an outrageous 1.1 percent from the prior month. That was frighteningly higher than the experts expected, and most of the gain – as Jackman said – came from energy costs.
Without food and energy, the CPI was up just 0.3 percent.
Despite being burned by the June report, the experts – always the optimists – are predicting tame inflation this month.
The consensus is that Thursday’s CPI — which measures costs from the 1st through the 31st of July – will show an overall gain of just 0.4 percent.
When you ignore the escalating price of food and energy, the experts think inflation will be half that much.
Those bold, rose-colored predictions make Thursday’s figure that much more intriguing.
Given the fact that speculators are finally giving up control of the energy markets, that sort of optimism might almost seem warranted.
But it’s probably not – and I’m now going to tell you why. (Hopefully what I’m now doing is lowering expectations to more reasonable levels.)
Recent drops in gasoline prices, which are a major component of the CPI, probably won’t be captured in the July CPI.
In fact, even though gasoline has fallen to about $3.88 a gallon nationwide, the CPI will likely treat the fuel as if it was still around $4.10.
Why? Because the 22-cent a gallon savings probably didn’t come in time for the latest survey.
A source that works on the inflation numbers said that the Energy Department’s and CPI’s gasoline calculations “have traded within a penny of each other for months.”
In other words, it’ll probably happen again.
Gasoline just isn’t going to give the markets a break on Thursday.
In fact, if Jackman continues to be correct, the swing in the seasonal adjustments for the rest of 2008 could make the drop in gas prices nearly invisible to the CPI.
Another bad inflation report could cause great discomfort for both the Federal Reserve and the financial markets.
The Fed kept interest rates unchanged earlier this month and hinted that it was now focused mainly on the economy’s slow growth.
That’s code for “don’t expect a rate hike anytime soon.”
While the government reported that the gross domestic product rose by an anemic annualized rate of 1.9 percent in the second quarter of 2008, there was probably much less expansion than that.
Growth, in fact, might have been as low as 0.4 percent if the Commerce Department hadn’t used improbably favorable inflation assumptions in its calculations.
If inflation now becomes uglier, the Fed could have to start talking tough again or risk losing some of the impressive gains scored by the beaten- down dollar.
Stay out of the market.
In case you haven’t figured this out on your own yet, professional traders would like to see the stock market go higher. But each time they temporarily succeed, something called reality stops them.
The real scary part is that stocks should be rising; they usually do during a presidential election year.
That just goes to show you how troubling these times are.
Stocks scored a tremendous gain last Friday – after a horrid loss on Thursday, and a mild gain yesterday – despite the fact that the newspapers were riddled with bad news: AIG Corp’s $5.4 billion loss; Citigroup and Merrill Lynch having to pay back investors they cheated; a growing number of housing foreclosures; weak retail sales and, well, the list goes on and on.
The only good news: Europe is starting to do as badly as we are. And oil prices – which were being held hostage by Wall Street – were collapsing.
If there were a valid investment strategy called “misery loves company” then Europe’s problems would be great news.
And oil is only declining because the economy looks so weak that even crude manipulators can’t keep their game faces.
In other words, unlike other times, the fact that the economy is suffering does not translate into good news for stocks.
For that to be the case, the Federal Reserve would need to be in a position to cut interest rates.
If you read the first item above, you’ll understand why Ben Bernanke doesn’t have that luxury.
There’s no reason to play the market.