This blog post originally appeared on RealMoney Silver on March 29 at 8:07 a.m. EDT.
-- Woody Allen Interest rates went up across the board last week, likely reflecting a combination of four factors: a strengthening economy; a growing deficit caused by geometric growth in government spending, which, in some circles, has called into question the creditworthiness of the U.S.; concerns about the upcoming supply of U.S. notes and bonds; and forecasts of higher inflation. Most feel that the last bullet point (of higher inflation) has made the least significant contribution to the current rise in interest rates due to the wide output gap, a moribund residential real estate market, wage deflation and the effects of globalization, to name just a few of the reasons. The current artificially low readings on inflation and its salutary impact on real incomes might create the false illusion that the U.S. consumer appears poised to contribute to a self-sustaining domestic economy. Indeed, the recent strength in first-quarter 2010 retail sales is now being comfortably extrapolated by many managements, strategists and analysts. From my perch, however, there remains little question that the current inflation readings underestimate the true rate of inflation. As such, the misery index and real incomes are under more pressure than is apparent and represent a challenge to consensus growth expectations. The durability of the consumer's strength remains to be seen, but I would not necessarily extrapolate the recent consumer strength into the balance of the year. While the future course of personal consumption trends will be primarily dictated by the degree to which jobs are created in the months ahead (and secondarily by the slope of the housing recovery), one could argue that the improvement in spending over the past three months is a temporary catch-up to the hiatus in discretionary sales over the prior 12 months. If correct, once caught up, the consumer might be increasingly vulnerable, especially in light of the higher tax rates and the costs associated with sweeping regulatory reforms that will adversely impact both consumer and small business behavior as we move toward year-end. "Have you ever wondered why the CPI, GDP and employment numbers run counter to your personal and business experiences? The problem lies in biased and often manipulated government reporting." - John Williams, Shadow Government Statistics Williams might be hyperbolic, but I continue to believe that, by including owners' equivalent rent (OER) as well as other substitution and hedonic adjustments, reported inflation understates the real rate of inflation (see Barry Ritholtz) and the pressure on the middle-class consumer and on small businesses, which remain an important engine to domestic economic growth and job creation. Loading Comments... 1 2 3 Last » Next ›SHARE:
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