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Thread: Retail sales indicate rising inflation not rising consumption

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    Default Retail sales indicate rising inflation not rising consumption

    August retail sales up 0.4 pct., best in 5 months
    Sept. 14, 2010

    WASHINGTON (AP) -- Retail sales rose in August by the largest amount in five months, adding to evidence that a late spring economic swoon was temporary and not the start of another recession.

    Retail sales increased 0.4 percent last month, the Commerce Department said Tuesday. It was the second straight monthly increase and the biggest gain since March.

    Excluding a decline in autos, retail sales increased 0.6 percent. That followed two relatively flat months and a sharp drop in May.
    AntiSpin: Today's retail sales numbers are misleading. Consumers are not buying more stuff, they are paying more for it. Consumer price inflation is rising. That's why gold prices spiked from $1250 to $1270 on today's retail sales news.

    Background: Retail sales data are not inflation-adjusted. August auto sales volume fell along with other big-ticket items, such as appliances and furniture. Real (inflation adjusted) retail sales never climbs when auto sales volumes are falling. Unit costs are rising.

    Why: August retail sales growth came from department stores, clothing stores and sporting goods outlets that survived the retail crash of 2008 and 2009. They have regained pricing power and are starting to pass on higher finished goods import costs due to the weak dollar onto consumers. We forecast this development in Dec. 2008 to start by mid 2010. It is arriving on schedule.

    Policy Implications:
    The Fed's bluff to maintain near zero interest rates for the duration because "inflation is tame" will soon be called by the bond markets. The Fed will have to begin to talk about raising interest rates as inflation evidence mounts. But with the housing market turning down again, a rate hike to choke off inflation in the Productive Economy will promote deeper asset price deflation and re-crash the FIRE Economy, possibly leading to a second credit crisis.

    Investor Implications: Retail stocks may climb with higher profits and sales. However, the stock market overall will decline in response to the Fed's conundrum: how to continue to manage asset price deflation in the FIRE Economy without producing inflation in the Productive Economy. Perversely, even talk of a small rise in interest rates could produce a panic in the bond market. Conversely, if evidence of rising inflation continues to mount without a Fed response, the market will bid up yields anyway.

    Evidence:



    Auto unit sales volume have stagnated at 1983 levels when the US economy was three times smaller.



    Real retail sales is declining as inflation rises. Real retail sales does not rise when auto unit sales volumes are flat or falling.

    The most likely explanation for this development is inflation, and the rising gold price confirms it.


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    Last edited by FRED; 09-15-10 at 10:57 AM.

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