Information about finance, the economy and business. Entertaining and informative. Seeking Alpha Certified Mark Sunshine Chairman & CEO


Start­ing this week, Sun­shine Notes will have a reg­u­lar weekly report focus­ing on money sup­ply sta­tis­tics and selected eco­nomic data. The pur­pose of this blog entry will be to pro­vide data and analy­sis that is oth­er­wise under­re­ported in the main­stream media.

Money sup­ply

On July 17th, the Fed­eral Reserve dis­closed that M2 actu­ally declined dur­ing June. In its weekly report titled Money Stock Mea­sures, the Fed indi­cated that its esti­mate of M2 showed a decline in June to $7,686.7 bil­lion from $7,688.1 bil­lion in May. In addi­tion, nom­i­nal annu­al­ized growth of M2 for the 3 months from March to June, 2008, was +1.2%. Since the reported infla­tion rate (which is the head­line CPI as reported in the June, 2008, BLS CPI release) for the same period was 7.9% (com­pound annu­al­ized adjusted), that means that in real terms M2 shrank at a 6.7% rate for the March to June period!

June’s money sup­ply shrink­age is indica­tive of the con­tin­u­ing credit cri­sis and if the Fed does not move quickly to keep money sup­ply ris­ing in real terms the result will be both defla­tion and reces­sion. This will hap­pen despite high energy and other com­mod­ity prices and will trans­late into declin­ing liv­ing stan­dards for many Americans.


Barron’s reported on Fri­day, July 18th that the offi­cial cal­cu­la­tion of CPI may be over­stat­ing actual increases in prices. In Infla­tion Read­ings May Be Inflated
(sub­scrip­tion required), Barron’s reports that owner equiv­a­lent rent (which has approx­i­mately a 30% weight in the cal­cu­la­tion of CPI) may not cor­rectly reflect falling home val­ues. Over the last 12 months the owner equiv­a­lent rent com­po­nent of CPI has risen 2.6% despite a large drop in the value of 1 to 4 fam­ily homes. Owner equiv­a­lent rent is sup­posed to track the “real cost” of own­ing a home. The idea is that the replace­ment cost of a home is the amount that it would take to rent an equiv­a­lent home and by track­ing rental cost, infla­tion in home val­ues is esti­mated. Util­ity and other home own­er­ship costs are reported in sep­a­rate CPI categories.

CPI is the most widely reported and used mea­sure of domes­tic infla­tion. If it is not accu­rate, busi­ness and gov­ern­ment lead­ers will make poor deci­sions because of flawed data.

If Barron’s analy­sis is accu­rate, core CPI will mod­er­ate in the next sev­eral months and investors should have a more benign future view of inflation.

Posted in: Barron's, CPI, Credit Crisis, Federal Reserve, Inflation, Money Supply

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