Wednesday, December 27, 2006

"Goldilocks vs. Gold"

Is there a statute of limitations on predictions of higher inflation?

Jerry Bowyer answers this question in his latest on NRO:

Larry Kudlow has described this as the Goldilocks economy: decent growth, low inflation. But the gold bugs continue to warn that today’s high gold prices inevitably mean higher inflation.

BuzzCharts has written extensively on the ongoing debate among supply-siders on the usefulness of gold alone as an inflation bellwether. We’ve taken the position that the inclusion of other measures, such as interest rates, helps paint a more complete picture of future inflation.

Here’s some more data that should help settle the matter:

On December 15, the Bureau of Labor Statistics released its monthly consumer-price-index data, which showed that inflation was completely flat from October to November following a half-percent drop in each of the two prior months. This falloff in inflation has taken place despite the fact that gold prices have been rising. Measures like interest rates, however, are more predictive of inflation (or, in this case, the lack thereof). The 10-year Treasury note, for example, stands at 4.6 percent, virtually unchanged from a year ago.

Although the most recent producer price index showed a quick pop-up of inflation to 2 percent, readings for the previous months showed roughly 2 percent deflation. In addition, the implicit price deflator and the PCE price deflator — two other major inflation indicators — have shown very low and absolutely flat inflation, respectively.

Is there a statute of limitations on predictions of higher inflation? Or, to paraphrase Ronald Reagan, “shouldn’t they read the score to us once in awhile?”

Jerry Bowyer is an economic advisor to Blue Vase Capital Management and the author of The Bush Boom.