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No. 291: March CPI, Retail Sales, Trade

April 14th, 2010

JOHN WILLIAMS SHADOW GOVERNMENT STATISTICS

COMMENTARY NUMBER 291

March CPI, Retail Sales, Trade

April 14, 2010

__________

Annual Inflation: 2.3% (CPI-U), 9.5% (SGS)

"Strong" Retail Sales Should Prove Fleeting

Trade Deficit Widened

Recession Is Not Over

__________

PLEASE NOTE: The next regularCommentary is scheduled for Friday, April 16th, withanalyses of the March Industrial Production and Residential Construction data.

Best wishes to all, John Williams

No Official Call Yet on Recessions End. Of some interest, the National Bureau of Economic

Research (NBER)official arbiter of U.S. recessionsdid not call an end to the recession ithad been timing from the NBER-determined December 2007 onset. To its credit, despite all themarket and political hoopla, the Dating Committee met on April 8th and concluded thatdetermining the latest recessions "trough date on the basis of current data would be

premature." Assuming that position holds and that the economic downturn intensifies, ascurrently signaled by the deepening downturn in real (inflation-adjusted) annual change in broadmoney supply, the current recession simply may gain popular recognition as the longest anddeepest post-Great Depression downturn, as opposed to a double-dip recession.

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Todays numbers suggested contained inflation and good growth in retail sales, but such happyreporting will prove fleeting. On the side of business activity, consumers lack the income andcredit growth needed to support expanding consumption (seeCommentary No. 290). Such is abasic, and beyond short-lived weather, stimulus and seasonal factor distortions, personal

consumption and retail sales face plunging activity in the months ahead.

On the inflation front, the effects of higher oil prices again are pushing through the system, withU.S.-dollar-denominated oil still feeling some upside pressure from sporadic weakness in theU.S. currency and from ongoing global political tensions. Key to explosive inflation growthahead remains a savage sell-off in the U.S. dollar and dollar-denominated paper assets and/orheavy monetization of U.S. Treasury debt by the Federal Reserve. Both factors are likely tocome into play in the next year, as an intensified economic downturnironically signaled bydeclining annual real growth in the broad money supplyblows apart projections for thefederal budget deficit and related U.S. Treasury funding needs. This area will be reviewed inmore detail a Commentary next week.

Headline CPI Contained by Seasonal Adjustments. The Bureau of Labor Statistics (BLS)blamed the uptick reported in March CPI-U inflation on fruits and vegetables, having turned itsestimate of a 4.5% (Department of Energy reported 4.6%) monthly increase in gasoline pricesinto a 0.8% contraction with seasonal adjustments. Such adjustment patterns tend to reverse inthe second half of the year. Until the last year or so, CPI traditionally was reported by the BLSprimarily on an unadjusted basis, where the March 2009 CPI was up 0.4% instead of the headline0.1%. The headline number dominates the media and Wall Street, however, and few payattention to the patterns of the surveyed price changes, except for those unfortunate enough tohave to pay out of pocket to fill up a gas tank.

Notes on Different Measures of the Consumer Price Index.

The Consumer Price Index (CPI) is the broadest inflation measure published by U.S.Government, through the Bureau of Labor Statistics (BLS), Department of Labor:

The CPI-U(Consumer Price Index for All Urban Consumers) is the monthly headline inflationnumber (seasonally adjusted) and is the broadest in its coverage, representing the buying patternsof all urban consumers. Its standard measure is not seasonally adjusted, and it never is revised onthat basis except for outright errors,

The CPI-W(CPI for Urban Wage Earners and Clerical Workers) covers the more-narrowuniverse of urban wage earners and clerical workers and is used in determining cost of livingadjustments in government programs such as Social Security. Otherwise its background is thesame as the CPI-U.

The C-CPI-U(Chain-Weighted CPI-U) is an experimental measure, where the weighting ofcomponents is fully substitution based. It generally shows lower annual inflation rate than theCPI-U and CPI-W. The latter two measures once had fixed weightings -- so as to measure thecost of living of maintaining a constant standard of living -- but now are quasi-substitution-

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based.

The SGS Alternative CPI-Umeasures are attempts at adjusting reported CPI-U inflation for theimpact of methodological change of recent decades designed to move the concept of the CPIaway from being a measure of the cost of living needed to maintain a constant standard of living.

CPI-U. The BLS reported this morning (April 14th) that the seasonally-adjusted March CPI-Urose by 0.06% (up by 0.41% unadjusted) +/- 0.12% (95% confidence interval not seasonallyadjusted) for the month, after being unchanged (up by 0.02% unadjusted) inFebruary. Seasonally-adjusted, the CPI-U annualized rate of inflation for the three months endedMarch 2010 (March versus December) was 0.93%, against Januarys 1.36%. The annualizedquarter-to-quarter change for the average first-quarter 2010 CPI-U versus fourth-quarter 2009was 1.53%, against 2.62% quarterly change in the fourth-quarter.

Unadjusted, Marchs year-to-year inflation was 2.31% +/- 0.20% (95% confidence interval)against a 2.14% annual increase in February.

Year-to-year inflation would increase or decrease in next months April 2010 reporting,dependent on the seasonally-adjusted monthly change, versus the 0.09% adjusted monthly gainseen in April 2009. I use the adjusted change here, since that is how consensus expectations areexpressed. To approximate the annual inflation rate for April 2010, the difference in Aprilsheadline monthly change versus the year-ago monthly change should be added to or subtracteddirectly from March 2010s annual inflation rate of 2.31%.

For those interested in exploring the various facets of official CPI-U reporting, I continue to referyou to CPIwatch.com, a site prepared by one of my SGS colleagues.

CPI-W. The narrower, seasonally-adjusted March CPI-W also rose by 0.06% (up 0.46%unadjusted) for the month, following an unchanged (down by 0.01% unadjusted) reading inFebruary. Seasonally-adjusted, the annualized rate of CPI-W inflation for the three months endedMarch (March versus December) was 1.62%, versus 2.33% in February. The annualized quarter-to-quarter change for the average first-quarter 2010 CPI-W versus fourth-quarter 2009 was2.42%, against 3.25% quarterly change in the fourth-quarter.

Year-to-year CPI-W inflation rose by 3.04% in March, following a 2.82% February increase.

C-CPI-U. The Chain-Weighted CPI-Uthe fully substitution-based series that gets touted byCPI opponents and inflation apologists as the replacement for the CPI-Uis reported only on

an unadjusted basis. Year-to-year or annual inflation was 2.45% in March 2010, versus 2.23% inFebruary.

Where C-CPI-U inflation continues being reported somewhat higher than CPI-U inflation, andwhere the C-CPI-U in theory should be showing lower inflation, the inconsistencies suggestsome ongoing reporting difficulties with the CPI series.

lternative Consumer Inflation Measures. Adjusted to pre-Clinton (1990) methodology, annual

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CPI rose to roughly 5.6% growth in March 2010 from 5.5% growth in February, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPIreporting methodologies back to 1980, rose to about 9.5% (9.47% for those using the extra digit)in March, versus 9.4% in February.

The SGS-Alternate Consumer Inflation Measure adjusts on an additive basis for the cumulativeimpact on the annual inflation rate of various methodological changes made by the BLS. Overthe decades, the BLS has altered the meaning of the CPI from being a measure of the cost ofliving needed to maintain a constant standard of living, to something that no longer reflects theconstant-standard-of-living concept. Roughly five percentage points of the additive SGSadjustment reflect the BLSs formal estimate of the impact of methodological changes; roughly

two percentage points reflect changes by the BLS, where SGS has estimated the impact nototherwise published by the BLS.

Gold and Silver Highs Adjusted for CPI-U/SGS Inflation.In the current cycle, gold and silverprices have yet to approach their historic high prices, adjusted for inflation. Even with the recent

December 2, 2009 historic high gold price of $1,212.50 per troy ounce, the prior all-time high of$850.00 (London afternoon fix, per Kitco.com) of January 21, 1980 was not breached in terms ofinflation-adjusted dollars. Based on inflation through March 2010, the 1980 gold price peakwould be $2,377 per troy ounce, based on not-seasonally-adjusted-CPI-U-adjusted dollars, andwould be $7,559 per troy ounce in terms of SGS-Alternate-CPI-adjusted dollars.

In like manner, the all-time high price for silver in January 1980 of $49.45 per troy ounce(London afternoon fix, per silverinstitute.org) has not been hit since, including in terms ofinflation-adjusted dollars. Based on inflation through March 2010, the 1980 silver price peakwould be $138 per troy ounce, based on not-seasonally-adjusted-CPI-U-adjusted dollars, andwould be $440 per troy ounce in terms of SGS-Alternate-CPI-adjusted dollars.

As shown on page 22 in theHyperinflation Special Report, over the decades, the price of goldhas more than compensated for the loss of the purchasing power of the U.S. dollar as reflected byCPI-U inflation, while it has effectively fully compensated for the loss of purchasing power ofthe U.S. dollar based on the SGS-Alternate CPI.

Real Money Supply M3. The signal of pending intensification of the economic downturn, basedon the annual contraction in the inflation-adjusted broad money supply (M3), was discussed in

the priorCommentary No. 290. The annual real contraction in March M3 (SGS-Ongoing)

estimated for that Commentary was 5.8%.Based on todays CPI-U report, that annual

contraction was 6.0%.

March Retail Sales Put in a Strong Showing, on the Surface. Reported strong automobilesales and upside revisions to earlier auto sales reporting helped to spike reported March retailsales and to produce upside revisions to February and March data. Year-ago March 2009,however, was the trough of the seasonally-adjusted reporting, and there well may be ongoingseasonal factor distortions at play here. With the monthly re-jiggering that goes on with thesenumbers, it is interesting to note that the retail sales level for March 2009 was revised lower. Itmay take the looming benchmark revision to recast these data more accurately. Also, it is worth

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noting that the Census Bureau relies on its own independent sampling survey of auto sales, noton industry reporting, which is complete, not sampled.

To the extent that the March data reflected any pick-up following bad weather in February, suchwas a one-time shot. The problem remains that underlying consumer income and credit

conditions cannot sustain growth in retail sales, as discussed in the openingcomments. Separately, the retail sales data will be going through a major benchmark revision onApril 30th, which may show a much weaker historical series than is in place now. Nonetheless,this mornings report (April 14th) was a positive one on the surface and likely will help keep

reported first-quarter real GDP growth in positive territory.

Reported Nominal Retail Sales. Todays (April 16th) retail sales report for March 2010 issued by the Census Bureauindicated a statistically-significant, seasonally-adjusted monthlygain of 1.60% (up 2.15% net of revisions) +/- 0.6% (95% confidence interval). Such followed arevised 0.52% (previously 0.34%) monthly gain in February. On a year-to-year basis, the March2010 retail sales were reported up by 7.62% from March 2009, versus an upwardly revised

4.37% (was 3.85%) annual gain in February, with the March exacerbated by the severe troughseen a year ago.

Real Retail Sales. Based on March 2010 CPI-U reporting, inflation- and seasonally-adjustedmonthly March retail sales rose by 1.5%, where before inflation adjustment the current numberwas up by 1.6%, versus a 0.5% monthly real retail sales gain in February, the same as beforeinflation adjustment. March real retail sales rose by 5.1% year-to-year, versus a 7.6% gain beforeinflation adjustment. Real February sales were up 2.1% year-to-year, versus a 4.4% gain beforeinflation adjustment.

For the last 16 months, monthly real retail sales (CPI-U deflated) have been fluctuating around

an average of $161.2 billion (the deflated March number was $166.8). Smoothed for monthlyvolatility on a six-month moving-average basis, as shown in the accompanying graph, the patternof activity here has shifted to bottom-bouncing in terms of the level of inflation-adjustedsales. The recent bounce from short-lived factors and warped-seasonals appears likely to turnmuch lower in the months ahead. There has been no fundamental turnaround in economicactivityno recoveryjust general bottom-bouncing, as should be confirmed anew insubsequent reporting

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Core Retail Sales. The "core retail sales" methodology was revamped recently, where the netrelative monthly increases and/or decreases in gasoline station and grocery store sales weresubtracted from the full monthly retail sales number, instead of the total of gasoline station andgrocery store revenues each month. Assuming that the bulk of non-seasonal variability in foodand gasoline sales is in pricing, instead of demand, the revamped reported "core" change moreclosely reflects the actual retail sales experience. This remains a work in progress and eventuallywill be used in the development of additional SGS alternative economic measures.

For the near-term, the "core" retail sales is reported in two versions, where Version I uses theoriginal methodology, and Version II version appears to provide a more balanced picture of theimpact food and energy inflation in the standard retail sales reporting.

Consistent with the Federal Reserves predilection for ignoring food and energy prices when

"core" inflation is lower than full inflation, "core" retail sales:

Version IMarch retail sales net of total grocery store and gasoline station revenuesrose by2.1% versus the official aggregate gain of 1.6%.

Version IIMarch retail sales net of the monthly change in revenues for grocery stores andgasoline stationsrose by 1.6% versus the official aggregate gain of 1.6%.

Wider February Trade Deficit Suggests 1st-Quarter 2010 Deterioration versus 4th-Quarter

2009, Net of Inflation. For February 2010, the Bureau of Economic Analysis (BEA) and theCensus Bureau reported the nominal (not-adjusted-for-inflation) seasonally-adjusted monthly

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trade deficit at $39.7 billion, up from a revised $37.0 (previously $37.3) billion deficit inJanuary, and up sharply from the $26.5 billion monthly deficit in February 2009.

Against January 2010, the February trade balance reflected both higher imports and exports, witha sharper increase in imports, due partially to higher physical volume (not higher prices) in oil

imports. Against February 2009, the sharp annual deterioration reflected largely an 86% annualincrease in oil prices.

Adjusted for seasonal factors and inflation (2005 chain-weighted dollars as used in reporting realGDP), the January and February 2010 respective merchandise trade deficits were $40.9 and$42.5 billion, which annualize to a real (inflation-adjusted) annual deficit of $500.3 billion. With$500.3 billion of annualized deficit in place so far for first-quarter 2010 (there will be no furthertrade data released before the April 30th "advance" estimate of first-quarter GDP), and with theannualized real pace of the merchandise deficit in the fourth-quarter at $492.2 billion, the tradedeficit appears likely to provide a net drag on first-quarter 2010 GDP, after having helped toboost reported GDP growth in the third- and fourth-quarters of 2009.

For the month of February 2010, the not-seasonally-adjusted average price of imported oil was$72.92 per barrel, versus $73.89 in January 2010 and $39.22 in February 2009. In terms of not-seasonally-adjusted physical oil imports, February 2010 volume averaged 8.689 million barrelsper day, versus 7.912 million in January 2010 and 9.103 million in February 2009.

Week Ahead. Given the underlying reality of a weaker economy (and likely re-intensifyingdownturn) and more serious inflation problems than generally are expected by the financialmarkets, risks to reporting will tend towards higher-than-expected inflation and weaker-than-expected economic reporting in the months ahead. Such is true especially for economic reportingnet of prior-period revisions.

Industrial Production (March 2010). March industrial production is due for release tomorrow,Thursday, April 15th. Some seasonal-factor catch-up and early signs of intensified downturnoffer the risk of some downside reporting surprise to consensus estimates of a 0.7% monthly gain(per Briefing.com), versus the 0.1% gain reported for March. Any "rebound" from negativeimpact of severe February weather would be a one-shot event.

Residential Construction (March 2010). Due for release on Friday, April 16th, March housingstarts are not likely to show a statistically-significant monthly change, although levels of activityare at fair risk of starting to fall-off sharply, again. While a small monthly gain may be expected,again, any "rebound" from negative impact of severe February weather would be a one-shotevent.

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