January 14, 2011 at 9:26 PM
The Thomson Reuters/University of Michigan preliminary January index of consumer sentiment decreased to 72.7 from 74.5 a month earlier and I think I know why. If consumers can’t find an adequate amount of good paying jobs but are nevertheless faced with significant cost of living expenses, they tend to be unhappy.
The cost of living climbed 0.5% in December from November according to the Labor Department. Yes, that’s ½ of 1 percent in just one month. For all of 2010 consumer prices rose 1.5%, but in the last six months the average increase in CPI was .25%. That means the cost of living even as measured by the government is rising at over a 3% annualized rate over the last half year.
However, Bernanke won’t care about rising Producer, Consumer and Import Prices. Instead he will look at the core rate of inflation, which rose 0.1% for a second month in a row. That held last year’s increase to just 0.8%, which was the smallest annual gain since records began in 1958.
Falling home prices and a record low core rate of inflation will keep Bernanke panicked about deflation, even though in reality we are all paying higher prices for the things necessary to subsist. The fact is that the government’s methodology of calculating inflation will not display a danger signal to the Fed until real inflation rates are growing at double digit rates.