The latest Personal Incomes and Outlays report showed that the Personal Consumption Expenditures (PCE) price index was only up 1.4% from the same quarter a year ago. Excluding food and energy, the PCE was up 1.5%.
Yesterday, I made this sure-fire prediction: “Consumers like falling prices but the Fed sure doesn’t. Expect to hear more ‘transitory‘ comments from Janet Yellen.” For details, please see Personal Income Flat in June, May Revised Lower: PCE Inflation Down Again.
Yellen did not chime in today, but Loretta Mester, president of the Cleveland Fed did.
Bloomberg reports Fed’s Mester Expects Inflation to Rebound From One-Time Factors
Federal Reserve Bank of Cleveland President Loretta Mester is keeping the faith that weak inflation will bounce back, even as she lowers her estimate for where unemployment begins to trigger higher prices.
“My suspicion is it’s the idiosyncratic factors, it’s transitory and that the factors pushing down inflation are going to dissipate over time,” Mester told reporters on Wednesday after delivering a speech to Ohio community bankers in Cincinnati. “I still have a forecast for a gradual increase in inflation back to 2 percent over time.”
The Fed’s preferred inflation measure was 1.5 percent in the 12 months through June, after stripping out food and energy components, still below its 2 percent target.
How Long Has This Been Goin On?
Inquiring minds may be wondering how long these transitory factors have been going on. I can help.
Here is a chart of the Fed’s preferred inflation index, PCE excluding food and energy, since 1992.
The Fed hit its inflation target precisely one time in the last 9 years.
I happen to have a musical tribute.
One Time Factors
The new definition of transitory is on the order of 9 years. And in regards to “one-time” factors, it seems Mester needs to study the above chart carefully.
The Fed would also be advised to study asset inflation because they sure blew another bubble.
Economic Challenge to Keynesians
Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.
I have commented on this many times and have been vindicated not only by sound economic theory but also by actual historical examples.
- My article Deflation Bonanza! (And the Fool’s Mission to Stop It) has a good synopsis.
- My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.
BIS Deflation Study
The BIS did a historical study and found routine deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.
It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.
Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?
Related Articles
- Secular Disinflationary Trend Hits New Highs: Deflation on Deck? What’s That Mean for Gold?
- Steen Jakobsen on the Next 30 Years: “Everything is Deflationary”
- Bogus Fed Research Claim: “Gold Standard Didn’t Really Tame Inflation”
Finally, please consider my 38 slide powerpoint Venture Alliance Presentation on trends in sentiment, asset bubbles, and gold.
Mike “Mish” Shedlock
The index also excludes college tuition and expenses, and has very unrealistic housing numbers. GIGA…
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excludes obamacare costs. excludes property taxes. excludes extra usage taxes on utilties (electricity, water, etc).
and excludes the cost of bribing government officials, which in many states has become a top 5 cost of doing business (not #1, but always in top 5)
CPI and PCE are irrelevant statistics — smoke and mirrors intended to confuse and distract.
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true, the expensive stuff is housing, cars, medical, and tuition.
We could use deflation in all of them.
of course, people could drive down tuition by starting their kids in a business instead of school, or going to trade schools so they can start their own business eventually.
that would fix the tuition problem in a hurry.
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Did you know there is home schooling for college?
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The dollar closed under 93 today, on it’s way to a multi-year low…Is this just inflationary, or are we headed into Volker era stagflation…
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Does anyone remember Nixon’s wage-price controls or Ford’s whip inflation now programs. In those days the government didn’t like inflation. I guess everything changed when we become a net debtor nation under Reagan.
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I remember those programs were designed to fail. All Keynesians (including Nixon) LOVE inflation — its state sponsored theft and they get all the spoils.
Paul Volcker is/was the only person in Washington DC who ever did anything about inflation.
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They keep manipulating the economy and then complaining that the free market doesn’t work.
I keep take more and different pills and still feel ill. Evidently I need more pills. What the doctor ordered.
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Maybe time to reintroduce Nixonian and Gerald Ford inflation-fighting policies once again, as their failure will finally produce the inflation so coveted by today’s Fed.
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“even as she lowers her estimate for where unemployment begins to trigger higher prices.” Can you explain this? Or is it a slip of the tongue? Did she mean rising employment? Since when did unemployment lead to higher prices?
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I believe she meant lower unemployment
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I don’t believe Janet Yellen has any idea what she is talking about.
She has no real world experience, she is just spouting unproven academic theories and total nonsense.
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(the rest of the Fed, including Loretta Mester, just parrot whatever the chair tells them)
monetary policy designed by a committee, led by a person with zero experience
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Here’s my contrarian viewpoint. The way I see it, the entire economy is based on buying things and then selling them at a higher price. I’m not just talking houses and stocks, but everything, including goods and services.
That is to say, we don’t have a barter economy. Once you realize this, then a lot of things make sense. Like the role of debt for instance!
I don’t deny that falling prices due to productivity increases is a good thing. However, if all prices were falling at once, the economy wouldn’t be able to function.
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I don’t understand: why, exactly, do you deify the economy (as admittedly it is currently defined)?
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Exactly why would the economy not be able to function if prices were falling? All falling prices mean, is that production is getting more and more efficient, while noone privileged is out there stealing those efficiency gains.
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To make a profit, a business needs to cover what it paid for all inputs (labor, materials, rent, etc.) and sell the product (or service) for a higher price than what it paid for the inputs.
Profit becomes harder (or impossible) if a business is operating in an environment where all prices are falling. There’s no incentive to produce something if it can’t be sold for a profit.
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So what you are saying is that you don’t get paid for your labor, you simply show up and wait for them to offer you money to leave at 5.
A real economy is paid for production, for creating things and providing service. Sales businesses make a commission for facilitating the sale…inventory, marketing and convenience.
You are pretending that we are all making a living from gambling, from stocks, simply buying low and selling high. THAT is a symptom of our illness that is killing our economy…this belief that we can all profit from doing nothing but taking a percentage of the action…a vig.
Your perspective is not unique, it is prevalent. It is VIRAL.
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But what if the prices of inputs also fall?
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@nortino – “Profit becomes harder (or impossible) if a business is operating in an environment where all prices are falling.”
Stock trading commissions have been falling in the USA since 1972… the investment banks are doing just fine thank you.
The cost of computer components have been falling almost as long — hardware manufacturers continue to do just fine.
Health care costs, postage stamps and other things controlled by the US government keep raising prices and yet continuously lose money… as politicians and government unions steal the money faster than it comes in.
Back in the 1700s, 1800s and first decade of the 1900s (before the Fed was created) — falling prices was the norm. Also, the US economy grew leaps and bounds, with each recession followed by growth that more than made up for it. Recessions didn’t permanently set the economy back until the Fed started “helping” and the dollar constantly lost value
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You just have to make sure you don’t carry finished goods inventory long enough for it’s depreciation to exceed your margin. Electronics makers, and farmers selling perishable goods, have been doing this for practically forever.
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Could prices be falling because of reduced money supply? Not all deflation is the result of greater productivity.
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Reduced money supply? where?
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“Reduced money supply? where?”
At the family level, the money supply is lower. Think about it. Peak debt and lack of extra disposable cash/income (some say half population cannot meet a $400 emergency). Obviously, am talking about the 99%.
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The target is meaningless. It takes till almost the next recession to reach a target of full employment. Full employment is almost fleeting during a business cycle.
The FED won’t be able to keep the target, once it ever gets there.
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Economies are based on consumer spending, not capital spending. Given that, GDP increases due to an increase in consumer spending. Inflation is the result of either an increase in the number of consumers or a decrease in scarce resources or a combination of both. Now I realize that this is an oversimplified explanation but it is never the less a true one. The equation changes once we throw in government spending. The inflation of the seventies was due mainly to the excess spending by the government on the interstate road system, the NASA program, and the Vietnam War. It didn’t help that deficit spending was increasing at the time and now we are living with that monster. Unfortunately deflation makes the deficit monster even worse since the tax money collected has lower “value” under deflation that it does inflation. But inflation does not tame the debit monster, it only makes it grow larger. The economy at large will benefit when deflation occurs if all prices are falling. Businesses will still make profits (the profits are factored in as costs) since inputs will cost less and offset the reduced prices of its goods and services.
Now the problem comes when consumer prices are the ones affected by deflation but asset prices and capital expenditures (one might include the cost of higher education in this category) and now, healthcare monopoly prices remain the same or become inflated. The savings of deflation are transferred to the rise in costs of the inflation based costs of living. The best the consumer can hope for is that such an offset has a neutral effect. I am amazed that so many economists fail to understand these points.
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I don’t deny that falling prices due to productivity increases is a good thing. However, if all prices were falling at once, the economy wouldn’t be able to function.,,
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@mish, an interesting quote today from my company’s chief technology officer (we work with major auto insurance carriers)
“I will be shopping for a new car that I hope will last until the year 2030. By then, I expect to stop driving since a fleet of always-available ride-sharing cars will drive me wherever I need to go, any time I want, with full Level-5 autonomy.”
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Reblogged this on World4Justice : NOW! Lobby Forum..
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I agree with regard to consumer economy, but the fed has to be concerned with public and private debt maintenance as well. Deflation increases the burden of debt maintenance, while inflation can reduce and even eliminate it. With average national debt interest rate of 2.268% in June 2017, if the fed can get inflation to 2%, the effective burden of that interest is much much lower. Same is true of private debt.
With an economy that runs on huge debt cycles (total public private debt well over GDP), debt maintenance is very important.
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The problem is the debt, not the lack of inflation to melt it away
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Let me be more specific
The problem is banks lend out more money than they have. It’s fraud. We need a 100% reserve system. Read the Case against the Fed and What Has government done to our money supply by Rothbard.
https://mises.org/library/what-has-government-done-our-money
https://mises.org/library/case-against-fed-0
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