Thursday, April 13, 2006

No Inflation Here…

A month ago I couldn’t get a rental car in Los Angeles from Hertz, Avis, Enterprise, Dollar or Thrifty, not to mention Budget.

So I got one from Ace Car Rental, which operates out of a small office in a dark alley near one of the LAX runways, uses no computers—just old fashioned pens and paper forms—and is, I am guessing, recommended by four out of five leading drug dealers.

Last week New York City was packed—stores, restaurants, sidewalks. Even the guy protesting some sort of stained-glass window situation in front of St. Patrick’s Cathedral (I am not making that up) had to fight to keep his spot on the steps.

This week in Atlanta the hotel was full and I almost lost my room thanks to a mix-up at the front desk, but the guy managed to scrape up something at the last minute.

So when this morning I hear a Deutsche Bank analyst is reporting that “RevPAR”—revenue per available room, the standard measure of strength in hotel room rates—was up 10% in the first quarter and could be stronger the rest of 2006 given booming business travel and strong vacation bookings, it comes as no surprise to me.

But somebody ought to tell the Fed that whatever inflation statistic they’re using has gone, as they used to say about well-intentioned experiments in 1950’s sci-fi flicks, horribly, horribly wrong.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


Barry Ritholtz said...

Jeff, haven't you heard? Except for everything going up in price, there is no inflation!

Imagine how bad it would be if we had both -- prices for everything you consume -- goods AND services -- rising, combined with inflation. Now THAT would be bad!

(sarcasm mode off)

Anonymous said...

Jeff, you're totally right about this, the anecdotal evidence is overwhelming. I think the continuing moderate rises in both CPI and PPI are a measuring swindle designed to hold down COLAs. The worst deal in the world is the US treasury tips that tons of bond managers seem to love. Would you lend money to someone who could tell you how much they were going to pay you back, and was dishonest about their own budget?

Alex Khenkin said...

Jeff, I'm not sure I follow your logic: when demand for hotel rooms is up, prices go up - and you call it "inflation"? Isn't this just ole good supply/demand working its wonders? Otherwise we'd have to acknowledge horrible double-digit inflation every summer with the start of high tourist season, only to be followed by equally devastating deflation every fall. I seem to remember reading somewhere that inflation was a monetary phenomenon, of which rising prices may or may not be a symptom.
Small Investor Chronicles

2ndbest said...

My home is up 75% in last 4 years.
My vacation home is up 200% in last 4 years.
My insurance payments are up 15% y/y.
My total (including State, City & Real Estate taxes) tax bill is up 20% y/y.
Education, medical (& dental) & transportation costs (X-gasoline)are up 15% y/y.
Vacations?? Common...that's the problem with the fed's calcs???

mehoffer said...


I hear ya, though increases in capacity utilization does not necessarily equate to "inflation".
Efficient pricing, to be tautological, leads to market-clearing conditions. In other words, the right price on the right goods, at the right time, lead to zero surplus of said goods( like what you were describing ).

Too much currency/credit chasing too few goods at "yesterday's" prices, leads to scarcity of said goods. Or, if price adjusted to seek equilibrium, higher prices.

Captain Obvious said...

I find it continually amazing that otherwise rational and intelligent human beings continue to believe the "core" CPI statistic has any real relationship with real inflation in the real US economy. It is really quite amazing.

From my perspective, the idea of measuring inflation based on a basket of goods and services which purposely excludes two major areas of expenditure (food and energy) which happen to be the most volatile, is patently ridiculous. What is the "core" inflation measure supposed to measure anyway? The rate of inflation in things that don't really go up or down in price very much? I guess that would tell you something, if the statistical black box that produces the statistic weren't so totally opaque and, anecdotally anyway, so consitently wrong.

My theory on why "core" CPI has been so benign for so long has very little to do with a perpetual worker productivity dividend (paraphrasing Dr. Greenspan) and an awful lot to do with two structural factors which have been in place for several years. The first is the continuing rise in consumer goods imported from low cost labor markets (e.g. China). The lower consumer prices paid for things like consumer electronics, toys and textiles which are increasingly imported from China can mask a lot of real underlying inflation in US manufactured goods and domestic services, while still keeping "core" CPI ridiculously low.

Similarly, I also suspect the influence of relatively low cost labor from undocumented workers in the US has a salubrious effect on the consumer prices paid for all sorts of services. Think housecleaning, landscaping, and restaurant meals as three obvious areas of impact. While I suspect this impact is much smaller than the import of low-cost goods from China and elsewhere, I also believe it is real.

Not to say there is anything wrong with any of this. Except that it gives a somewhat innacurate picture of the real impact of inflation on consumers in the real world, which probably means it wouldn't be great metric to use to drive monetary policy. Of course, since "inflation targeting" is one of the key principles of the new Fed Chairman, maybe there is something wrong with it.

And then there is the issue of what happens to US inflation when labor costs (inevitably) start to rise in China and India and/or some wrong-headed immigration "reform" throws out the baby with the bathwater in the quest to secure our borders.

Aaron Koral said...

Hi Jeff - the one ting I keep thinking about regarding travel is energy prices, namely gasoline and electricity. If regular unleaded gas hit $3.50 or more a gallon and electricity costs began to increase significantly due to a warmer-than-normal spring, I would be very suprised if there weren't a slow down in travel-related industries. I mean, how are the airlines and the hotels to continue passing along price increases without there being some sort of consumer capitulation? As always, however, I could be wrong....Happy Easter (and Passover) to all!!

Howard Lindzon said...

Why even talk about it. Only an idiot could not see that a pizza at an below average place costs $12.

Even the airlines have pricing power -

This will not end well but timing is a waste of energy.

Chug-A-Bug said...

Jeff, please don't knock Ace Car Rental... back in ye olden days when I was under 25 and needed a car LAX, that was pretty much the only option.

bpl1000 said...

Two weeks ago, I would've perilously argued inflation was relatively "moderate", considering that I was about to purchase a plane ticket to St. Louis for a very decent price. Alas, two weeks later, and that same ticket is up roughly 15%. That may be attributable to the recent sharp increase in oil, but with summer coming up, its very difficult to see airlines as competitively priced tickets.

This weekend, I happily saw a pie of pizza priced under $10, but this morning also experienced a 25% price increase in my danish this morning. But, as Captain Obvious points out, food fits in the overall CPI, not core CPI. If CPI is not an accurate measure of inflation, what is???

Well, just for fun, I opened up my cart, which tracks price increases and decreases - (up until the last time I had opened it, which was perhaps a month ago). It's a mix of books, and electronics that I had been shopping for:

Out of 24 items, 3 increased in price and 4 decreased in price and the rest stayed the same.

Obviously, this random basket of selective goods is not a very good indication of inflation, but it is an example that the price of goods are in flux, and not necessarily upwards en masse.