Hiding From Reality — Retail Sales And Inflation

According to CareerBuilder's latest survey, 77% of American households are living paycheck-to-paycheck.

Graph courtesy of Money Musings. Also look at my post Living Paycheck To Paycheck.

It follows that any rise in retail prices for food, energy, clothing, etc. will hit most households very hard. In the QE2/inflation/deflation debate, this CareerBuilder data is never cited. Never.

Here are the latest retail sales data from the Census Bureau. The data are not inflation-adjusted.

Graph from Calculated Risk.

Looking at unadjusted retail sales, you would think Happy Days Are Here Again. Sales are at about the same level as they were at the beginning of 2007. Note the widening gap between total sales and sales without gasoline (ex-gasoline). This gap had narrowed during the worst part of the recession, but is growing wider just as it did in 2006-2007 when oil prices were going through the roof. One certain conclusion: people are spending more on gasoline. Yet, U.S. gasoline demand took a nosedive after Labor Day.

Here's the real (inflation-adjusted) retail sales data. The data are "deflated" using the government's Consumer Price Index (CPI).

Graph from Eric Janszen's No inflation celebration from us.

Once retail and food service sales are adjusted for inflation, even when deflated using the suspect CPI, sales are nowhere near where they were at the beginning of 2007 (second graph above).  Apparently, Happy Days Are Not Here Again, at least not yet.

Here's Eric Janszen explaining the next graph—

The BLS uses the CPI to deflate Retail Sales to produce retail sales dollar spent by consumers net of CPI inflation. The CPI is tied to a wide range of government obligations, such as TIPS and Social Security payments, so we’re not confident in the CPI as an independent source of inflation data, especially during inflationary times. We are more comfortable with the producer price inflation (PPI) indexes that are not tied to government obligations. The PPI indexes are rarely re-composed. If we deflate Retail Sales by the PPI for finished goods, we get a very different result.

Graph from Janszen as above. The blue line is the percent-change year-over-year for the Producer Price Index (PPI). The red line is the percent-change year-over-year for retail sales deflated by the PPI. You can see that real retail sales (using the PPI instead of the CPI) have been falling since the mid-point of the recession.

That last graph is a bit complicated, but Janszen sums it up succinctly—

... we see Retails Sales continuing to fall in real terms since the mid-point of the recession. That means that even though unit sales volumes are up, inflation is up even more. We agree with Paul Volcker’s recent statement, that an economy cannot inflate its way back to health.

If you've been following the discussion about why we need QE2, purveyors of the status quo will tell you that the core CPI 0.6% inflation rate, which is the lowest annual rate we've had since 1957, signals that money printing is justified by the threat of deflation. This quote from the Financial Times is typical—

The biggest goal of the Fed’s new $600bn round of quantitative easing – nicknamed QE2 – is to get inflation moving back towards its target of “about 2 per cent or a bit below” by pushing down long-term interest rates.

This view point is hard to reconcile with Janszen's conclusion that even though unit [retail] sales are up, inflation (as measured by the PPI) is up even more. So you might well ask yourself what the Fed is really up to.

With regard to what Fed policy is meant to accomplish—CPI inflation "when you take out housing costs is a jaunty 1.9%"—and the obviously misleading retail sales propaganda numbers, I'll quote from New York Times columnist Bob Herbert's Hiding From Reality—

We’ve become a hapless, can’t-do society, and it’s, frankly, embarrassing. Public figures talk endlessly about “transformative changes” in public education, but the years go by and we see no such thing. Politicians across the spectrum insist that they are all about job creation while the employment situation in the real world remains beyond pathetic.

All we are good at is bulldozing money to the very wealthy. No wonder the country is in such a deep slide.

We don’t even seem to realize how deep a hole we’re in. If student test scores jumped a couple of points or the jobless rate fell by a point and half, the politicians and the news media would crow as if something great had been achieved. That’s how people behave when they’re in denial.

[My note: After reading that last paragraph, think about media celebrations of the retail sales numbers.]

America will never get its act together until we recognize how much trouble we’re really in, and how much effort and shared sacrifice is needed to stop the decline. Only then will we be able to begin resuscitating the dream.

I doubt Herbert has been reading DOTE, but if he had intended to convey the main message of this blog, he did a great job. I couldn't have said it better myself. And Bob—I find all this embarrassing, too.

Comments

[adamatari]

I've been reading Bob Herbert for a while, and I'm convinced he's both the smartest and the most grounded in reality of all the big columnists. The fact he isn't as famous as Krugman or Tom Friedman shows, to me, just how blind our society is to its problems. He's been writing articles like this for years (I seem to remember more articles about the problems of the black underclass back before the economy self-destructed, but that too is a sign of falling empire) yet somehow barely gets noticed. I'm glad you found him, and I sure hope he finds you.