Yeah, Retail Sales Are Up ... So Are Wholesale Prices

Dec.14.10 | About: Best Buy (BBY)

For the duration of what I estimate to be a 10-year economic slowdown (we are entering year four), you will hear countless experts proclaim that the economy has recovered. Economic recovery evangelists were temporarily silenced earlier in the year, but they have now come out in force. In today's FOMC statement, the Fed actually had the chutzpah to say: "The economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment." That the Fed can continually get away with saying such asinine comments this far into the recession is very surprising.

The economic recovery crowd will no doubt point you to the rise in retail sales. However, they will probably leave out a couple of key points. They probably won't tell you that wholesale prices rose 0.8% in November, the most in eight months. They also won't tell you that the rise in retail sales was driven largely by the rise in food and energy costs. I keep hearing that oil prices are rising, and that shows the economy is recovering. In that case, would $10 gasoline evidence an economic recovery for the ages? Is the weak dollar, not demand, not driving wholesale prices higher?

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Retail sales are denominated in dollars, so you would expect a rise in sales year-after-year on a nominal basis. Also, core inflation has been relatively stable compared to headline inflation, which includes the price of the goods that retailers are selling. Given the relatively muted inflation figures of our government, this implies some core prices are falling.

Retailers announced a "surprising " jump in apparel sales. Well, let me tell you that this shouldn't be so surprising since apparel was one of the few items in the CPI that went down year-over-year. Revenues (sales) may be up, but margins are down. Discounts started earlier this holiday season and lasted longer. Please see Best Buy (NYSE:BBY), which was down 15% this morning on weak earnings figures. So all in all, let's not get too bent out of shape about buoyant retail sales.

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CPI change Year over Year

The government will never tell you it is inflation that is driving economic statistics higher. The strong rise in commodities reflect an undercurrent of inflation that is eased away via government statistics. People will consistently be puzzled by the phenomenon of high unemployment and supposedly rosy economic statistics because the data has becomes so skewed at this point. This is why I always say to focus on the gold, dollar and bond markets. Focus on gold first and foremost, since it is a globally traded asset that is not easily manipulated by central banks, especially since they have drained reserves over the years. Government statistics are just noise in this ongoing economic drama.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.