Monday, February 22, 2010

Deflation Watch (January 2010): Core CPI Negative while PPI Accelerates

I need to keep this one short, but decided it was worth putting up at least some basic graphs given the interesting juxtaposition of an accelerating rate of PPI increases alongside the first decline in core CPI since 1982.

Some Relevant Current Articles
Consumer Price Index Trends: Great Depression versus Today through January 2010 (US)
(click on chart for a larger version in a new window)

Our avoidance so far of a sustained price deflation remains a big differentiator between then and now, though inflation has slowed more quickly than in Japan's post-1990 experience.

Annualized 3-Month Rate of Change for Components of US Consumer Price Index (April 2006 - January 2010)
(click on chart for a larger version in a new window)

Apologies for the crowded chart, but note in particular the continuous downward trajectory of the magenta line for shelter, which is a subset of the larger housing category. This represents a heavily weighted portion (32%) of the overall index. Most other measures are more volatile (in three month terms) and in positive territory, though recreation prices have been deflating for months. Also food prices (15% of CPI) seem to have recovered and been growing a little more quickly again.

Price Index Changes: Great Depression CPI versus Current PPI through January 2010 (US)
(click on chart for a larger version in a new window)

Look at the PPI measures for crude, intermediate, and finished goods. The accelerating price levels bear an uncanny similarity to the trajectory of the 2007-2008 price spike, which begs the question of whether they might crash in a similar way again as well. The answer likely depends on how much commodity prices are being affected by financial market speculation (controversial!) and how sustainable the resurgence in developing market growth is, especially China (the concerns regarding unsustainable private credit growth in China seem very valid).

16% Trimmed CPI

The 16% trimmed mean CPI (generated from the Cleveland Fed site) removes the most extreme monthly price changes:

(click on chart for a larger version in a new window)

CPI in Japan (Jan 1980 - Jul 2009)

From previous posts, for reference: "The peak of Japan's CPI occurred in October 1998, almost eight years after the stock market peaked, and Japan's notorious mild deflation has been in effect since then. A multi-year disinflation (of core CPI) leading to sustained mild deflation is one possible outcome for the US.
(click on chart for a larger version in a new window)

A Note on Seasonal Adjustments

I had previously been using seasonally adjusted figures for all the measures except headline and core CPI, as I assumed as aggregates that those would be smoothed out pretty well, and didn't know how effective the seasonal adjustment process is. Also the Great Depression data is not seasonally adjusted, nor are many other countries' data (such as within Europe). But there does appear to be an overall drop in prices through every December, and increase through every June, as the graph below shows, so I've switched to seasonally adjusted figures for everything.

Tuesday, February 9, 2010

Macroeconomic Balance Sheet Visualizer — Draft

I've been loosely following discussion of Circuitism and Chartalism (Modern Monetary Theory) since late summer or early fall, though I have not yet had time to work through some of the details to my satisfaction. But it's clear to me that the core accounting principles emphasized by Modern Monetary Theory are accurate, and that the MMT perspective is highly relevant to the global economy right now. At some point I hope to address some of my current issues with it, but they take secondary priority.

On some of the blogs I visit I've seen a lot of time spent discussing the mechanics of various macroeconomic operations (though I haven't had time to read or comment in much depth), and it always strikes me that a lot of time could be saved with better reference material on this stuff, whether wiki-based or otherwise. Discussion threads seem to lead to a lot of repetition of the same topics, ambiguity in descriptions, people talking past each other due to having different understandings of what concepts mean, etc.

It occurred to me to go ahead and try to put together a visual tool myself to help visualize and document some of these macroeconomic concepts. It was also an excuse to play with SVG (browser technology) for the first time.

NOTE: This is a preliminary DRAFT copy of a tool to help visualize the balance sheet effects of these concepts. I am hoping for feedback from folks who are already knowledgeable on these topics and can correct my mistakes. If you are learning this like me, I recommend you skip this until an updated version is ready, otherwise you could be unnecessarily misled or confused. I will post another blog entry when a more polished version is ready — both more accurate, and with added features, usability, more accessible step-by-step walkthrough, etc.

Here's the tool: Macroeconomic Balance Sheet Visualizer (DRAFT)

I welcome anyone (but especially those with a better understanding than me) to offer corrections and constructive feedback in the comments section below or via email (the address is on my profile). Thanks!

P.S., I'll hopefully be adding additional operations (equity/stock offerings, more central bank operations, markets repricing tradeable securities, etc) as well as adding better visualization of flows rather than just stocks (quantities). Plus depicting asset bubbles, the balance sheet outcomes of Japanese vs Great Depression vs "ideal" resolutions, balance sheet breakdowns within each sector, etc.

List of Updates to Balance Sheet Visualizer:

UPDATE1 2/22/2010: Renamed assets held by Treasury from 'Reserves' to 'Treasury Deposits' (abbreviated for now until able to show more detail).

UPDATE2 2/25/2010: New feature: Mouse over a balance sheet name to compare the balance sheet side by side with a copy from before the last operation.

Monday, February 1, 2010

Consumer Price Level Trends Still Vary Widely Across Debt Bubble Countries

Here is a quick update to the graphs from a prior post on international consumer price levels titled "Global Price Level Trends Show Varied Inflation/Deflation Across Housing Bubble Countries":
(click on chart for a larger version in a new window)

Given how much it has been in the news lately, I have added Greece to the price level graph. However, I excluded Greece from the three month trend graphs below because it is so seasonally volatile (and the European Harmonized Indexes of Consumer Prices don't seem to offer seasonally adjusted series). Nevertheless, as you can see in the absolute price level graph above, overall prices are roughly 3% higher than in July 2008 when global commodity prices peaked. This is near the high end of the countries I've included (excluding Iceland which is a dramatic outlier). A quick look at one summary of Greece's CPI suggests fuel prices for transportation and heating have been a big part of the increase in 2009, but it appears that other prices have been rising too.

Here is the three month trailing rate of change of consumer prices:

(click on chart for a larger version in a new window)

And here is the exact same chart zoomed out to show all the Iceland data:

(click on chart for a larger version in a new window)

Japan and Ireland are the only countries showing significant deflation at present.

I think my concluding thoughts from the last post are still relevant:
This was a very rough high-level look at relative price level trends and short term inflation rates over a sampling of housing bubble countries and other countries of interest (Japan, Iceland). More insights would be likely with additional analysis such as adjusting for exchange rate trends, comparing rates of government deficit spending, comparing changes in private debt levels, etc.

The price level trends across countries show some correlation at times (e.g., late 2008), suggesting global macroeconomic factors matter to some degree, but also diverge significantly at other times (e.g., the current -4% to 8% range of 3-month annualized inflation across countries), suggesting domestic country-specific dynamics are the dominant factors in price level trends, even at times of global recession/crisis.

There are at least three key domestic dynamics that could be most heavily influencing price levels. One is the degree of government stimulus relative to the contraction in private spending. A second is whether private debt bubbles have actually popped or are still growing. A third would be the relative size of these debt bubbles (total debt-to-GDP) and their recent rate of growth (since added debt contributes to annual aggregate demand).

I have not included enough data in this post to evaluate these factors for each country. But at the risk of being wrong, my current assumption is that size of government response is the number one differentiating factor, and some countries are maintaining a stronger private-sector bubble mentality than others (e.g., with respect to Australia's housing prices). If government stimulus proves politically unsustainable, or private sector debt bubbles collapse and prove to be overpowering, it could be that countries like Australia will simply lag countries like Ireland with respect to consumer price deflation. Ireland may be the country to watch — I've seen suggested that it may have begun a full scale debt deflation.

Note that different countries construct their CPI measures differently, so some trend differences likely reflect what each country considers a representative "basket" of goods and services, though the European data is all drawn from Harmonized Indexes of Consumer Prices. Also the US, UK, Ireland, Spain, Iceland, and Euro 27 price levels are not seasonally adjusted. I think Japan's and Australia's are seasonally adjusted, but am not certain.

Looking at absolute price level charts rather than just rate of change (typically year-over-year) seems especially valuable when price levels are not moving in a single direction (until the recent deflationary trends, the direction of CPI indexes was primarily up).