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.

  1. My article Deflation Bonanza! (And the Fool’s Mission to Stop It) has a good synopsis.
  2. 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

  1. Secular Disinflationary Trend Hits New Highs: Deflation on Deck? What’s That Mean for Gold?
  2. Steen Jakobsen on the Next 30 Years: “Everything is Deflationary”
  3. 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