US Inflation Trounces New Orders

-Report Shows Prices Rise as Orders Fall

(SEATTLE) 08/19/2004 - The worst fears of economists have been confirmed by today’s Philadelphia Fed report—that the Federal Reserve is so far behind in raising interest rates, that higher prices are creating bottlenecks for US orders and production. (1)

In today’s report, all current indexes fell except the prices paid index--which rose. This means that firms and the overall economy at large are falling into an inflationary cycle that is so bad, it is causing bottlenecks and disruptions, including job loss.

One of the problems leading to this scenario is the common focus on the US Consumer Price Index (CPI) as if it were reliable. However, due to a number of recent adjustments and macro-economic peculiarities, a large part of the CPI is inversely related to costs, instead of positively related. Such includes housing costs, as well as vehicle costs--with large auto companies having production and credit monopolies, while dropping the “list/rebate” price on vehicles so as to effect a net benefit via their credit arms. This creates the false image of “deflation.”

A similar problem led to the Great Depression—vast numbers of companies found they could sell things on credit at low prices, giving the false impression of low inflation, even while principal financed amounts went up. Although a Depression doesn’t appear likely, a bond market crash does, as debt instruments will soon be re-priced to include actual value and risk.

The inflationary trend shown in the Fed report is further confirmed by the leading indicators in the Journal of Commerce ECRI Industrial Price Index, which is breaking out to new highs.

(1) “Firms again reported higher prices for inputs and for their own manufactured goods” (August 19, 2004)