Markets surge on fake US inflation data

Inflation in America dropped to zero last month - yes zero - and the news sent the Dow up over 500 points and our market followed with a 78-point surge.

So, happy – low interest rate and high share and property values – days are here again? Goodbye to any more supposedly ‘punishing’ rate rises from their Fed and our Reserve Bank?

Well, actually, not so fast – although true, in the case of the Fed, it will seize any opportunity to back off rate rises to keep the greediest people on the planet as indulgently rich as possible.

The drop in inflation to zero was all and only about oil and so ‘gas’ – their petrol. The oil price fell sharply through July, the prices of everything else in the US kept going up.

Food prices, for telling example, were up 1.1 per cent on the month, making a rise of just under 11 per cent for the year.

Inflation is still a big – arguably the big – problem in the US, and indeed everywhere else.

Just as oil prices can fall in any particular month or week, they can rise – and in the last week they have kicked up.

To my mind the US inflation numbers, and the market reaction, shows two follies.

The first is the folly of monthly inflation figures.

We don’t need them; they are erratic at best and always statistically dodgy – just like indeed the monthly jobs numbers.

The second folly – and indeed outright stupidity – is the so-called market (decidedly) over-interpretation of, and over-reaction to, them.

It was therefore amusing-to-depressing to see this living example of useless-to-dangerous monthly inflation data in the same week our own Australian Bureau of Statistics finally bowed to pressure to start producing monthly CPI numbers for Australia.

Of course, so-called market economists and generalised spruikers want more data like monthly inflation numbers.

The Dow Jones rallied more than 500 points overnight on Wednesday after the release of US inflation figures. Picture: Johannes Eisele/AFP

It gives them more – statistical snake-oil - to sell.

But any analyst with a shred of competence and integrity would take monthly figures – whether inflation, jobs, retail sales, or indeed anything - to combine them back with, say, the previous two months to get more reliable, more solid quarterly data.

It’s not just the oil price jumping up and down; it’s in the very nature of sampling with a bigger margin of error.

So, US inflation was still 2.3 per cent over the three months to July.

That’s nearly 10 per cent in annualised terms.

That’s still an inflation problem.

And the US is still teetering on sliding into exactly the wages-prices spiral that CBA CEO Matt Comyn warned about – for Australia – in his comments around the annual result.

None of this is denied by equally silly talk of the US plunging into recession after the two successive quarters of negative GDP growth.

That’s a so-called ‘technical’ definition of recession; it’s actually the moron’s definition.

Again, we had and always have had a similar analysis problem with the US GDP data – but in reverse.

Because in the US they report the GDP change on an annualised basis.

So a tiny 0.3 per cent quarterly GDP fall - statistically, going sideways - is officially reported as a (seemingly, statistically relevant) 1.2 per cent fall.

Put the US ‘technically’ sliding into recession together with a month of zero inflation - and hell, the Fed won’t just stop hiking, it will start slashing, rates!

In what remains of semi-sanity in this crazy world, it will all-but certainly see the Fed pull back from another 75-point hike at its next meeting in mid-September; most likely doing 50 points, but possibly only 25 points.

So, Wall St – and our derivative downunder market - get this short-term kicker.

Until one form or other of reality gives it to us hard.