The Wall Street Journal and Bloomberg both posted ridiculous articles regarding today regarding inflation.
The former was on “bad options” the latter on “inflation expectations”.
Let’s take a look at both articles because both represent widely believed nonsense.
In Bad Options for Addressing Too-Low Inflation, Wall Street Journal writer Greg Ip says the Fed’s choice is to overheat the economy or give up its 2% target.
Unemployment and inflation are near their lowest levels in decades. Who wouldn’t love that?
Janet Yellen, for starters.
What looks like a dream economy could be a nightmare for the Federal Reserve chairwoman. Ms. Yellen’s worldview assumes that when unemployment is this low—4.4% in August—inflation should move up to the Fed’s target of 2%. Instead, it may have stabilized around 1.5%. That presents the Fed with some unpalatable options: deliberately overheat the economy for years to get inflation back up, then potentially induce a recession to stop it from overshooting; or give up on the 2% target, which could hobble its ability to combat future recessions.
This isn’t scaremongering: It’s the logical consequence of how central banks believe inflation operates. At the center of their model is the Phillips curve, according to which inflation edges lower when unemployment is above its natural, equilibrium level and putting downward pressure on prices and wages. Below that natural rate, also known as full employment, inflation crawls higher.
Until recently, Fed officials scoffed at the possibility [Trend inflation has fallen]. They noted surveys that suggest the public still expects inflation to return to 2% and credit their oft-repeated promise to hit their 2% target. But are they fooling themselves? Expectations of inflation are determined in great part by what inflation actually has been, and after every recession since 1982, core inflation has averaged less than in the previous business cycle: 4.1% in the 1980s, 2.1% in the 1990s, 1.9% in the 2000s, and 1.5% since 2009.
To get inflation higher, the Fed would have to engineer the opposite of the past 35 years: a prolonged boom that drives unemployment below its natural rate until inflation returns to 2%. As actual inflation rises, so would expectations, locking in the higher trend. To achieve this, Ms. Brainard suggests interest rates shouldn’t rise much more, if at all.
This approach could aggravate another worry: financial excess. If stocks and property look bubbly now, imagine what five more years of very low interest rates would do.
The alternative is to ditch the 2% target and accept 1.5% as the new inflation trend. Besides shredding the Fed’s credibility, that would mean lower trend interest rates and thus less rate-cutting ammunition to fend off the next recession. If history is any guide, that recession would push trend inflation down further.
Complete Nonsense
There is so much utter nonsense in those paragraphs I hardly know where to start. But we have to start somewhere.
- It’s widely known that the Phillips Curve is totally discredited. That Janet Yellen still has faith in the curve is proof enough of her incompetence. For discussion, please see Fed Study Shows Phillips Curve Is Useless: Admitting the Obvious.
- Inflation expectations are nonsense. People believe inflation will be 2% simply because economic illiterates at the Fed and in mainstream media repeat 2% at every turn. Repeat lies often enough and people regurgitate them whether they really believe them or not!
- Credibility? Please be serious. The following chart tells you all you need to know about credibility.
Twelve Thumbs Down
The Fed has no credibility and it’s ludicrous for Greg Ip to propose otherwise.
That was a sorry, sorry article. I have agreed with Ip on many occasions. His latest gets 12 thumbs down.
Lost Credibility
Here’s the ironic kicker to this sorry saga: Bloomberg reports Fed Officials Admit They’ve Lost Some Credibility on Inflation.
Anchors aweigh?
After years of maintaining that inflation expectations were stable and solidly grounded, Fed policy makers are starting to recognize a small but worrying softening in the outlook that consumers, businesses and investors have for prices.
“They’re acknowledging that the inflationary anchor has slipped a bit,” said Ethan Harris, head of global economics research at Bank of America Merrill Lynch in New York.
“There is no single highly reliable measure” of longer-run inflation expectations, Fed Governor Lael Brainard told The Economic Club of New York on Sept. 5. “Nonetheless, a variety of measures suggest underlying trend inflation may currently be lower than it was before the crisis” of 2008-2009.
Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., said he didn’t think that Yellen was overly concerned by what might be a slight shift down in the inflation outlook of consumers and companies. She would though become more worried if they deteriorated further, he said.
Although Fed officials are increasingly open to the idea that expectations have slipped, none have gone so far as to say that they’ve become completely untethered.
“Unanchored is kind of like a four letter word for central bankers,” Bank of America’s Harris said. “I don’t think expectations are unanchored, but I do think the Fed has lost a little bit of credibility for achieving its 2 percent target.”
No Reliable Measures
“There is no single highly reliable measure” of longer-run inflation expectations, Fed Governor Lael Brainard told The Economic Club of New York on Sept. 5.
Lovely. He’s also correct. Yet, he proposes to know what to do about it! How idiotic is that?
Let’s get straight to the point that Bloomberg missed and Greg Ip missed.
Why does anyone think they know the correct amount of inflation in the first place?!
Here’s the deal: I don’t know, nor does Greg Ip, nor does Bloomberg, nor do any of the clowns at the Fed. Yet, we have idiotic discussions about “bad options” to achieve targets that are undoubtedly bad, and cannot be accurately measured in the first place!
Yet, we have idiotic discussions about “bad options” to achieve targets that are undoubtedly bad and cannot be accurately measured in the first place!
Three successive bubbles and decades of missed targets with the Fed chasing its tail are proof enough.
Greg IP needs some help. I suggest Debunking MMT, Keynesianism, Monetarism: Reader asks “What theories do you believe?” Mish Reading List
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?
Finally, and as a measure of insurance against the Fed’s clueless tactics, please consider How Much Gold Should the Common Man Own?
Mike “Mish” Shedlock
Do I remember a time. like 2 years ago, when Yellen was looking at 5.0% unemployment as the magic number called full employment? I can’t keep track of all the Federal changes that they have done and it seems like all apples to oranges comparisons now.
They don’t have a clue.
Take Obama’s chair of Council of Economic Advisors, Christina Romer. Led the argument for ARRA (the $800+ stimpack). Produced a paper showing effect on economy with and without ARRA. Take a look at figure 1.
https://www.dartmouth.edu/~bsacerdo/Stimulus2012_06_21.pdf
Even with passage of ARRA, UE went HIGHER than Romer thought if not passed.
Good article, Mish. Inflation is great for early recipients of the new money and bad for others. The end result is at best a wash (except it isn’t really, because inflation results in distortions in markets for goods and services). This concept is rudimentary, but the government and its cronies (which are all early recipients) SUDDENLY AND SURPRISINGLY hold a different viewpoint. Gasp!
Yellen and cronies need to get out and do the family shopping themselves a little more often. There’s plenty of inflation in the world … in the last couple of years, I’ve gone grocery shopping several times in the USA, UK, France, Germany, and Singapore, and many of the things I have bought have trended upward in price at a rate that outstrips the average wage increase of the locals. A single journey on the Tube in London went from £4.00 in 2010 to £4.90 now and is slated to go even higher. Yeah, petrol goes up and down, but there is more to life than driving.
Inflation is how they are reducing the average folk to serfdom.
The jackasses at the Fed have only one ability and that is the ability to print money from thin area. Given the importance assigned to these pompous asses, it looks like it is the only ability that matters. We can only rail against these jokers…
Do these morons actually live in another country? They seem so removed from reality that it’s hard to listen to anything they say.It’s as fingers on a chalkboard.It is more than discouraging, to say the least.
Interesting to speculate how long it will be before the youngsters being taught economics and finance in Uni turn on their mentors and challenge them on the garbage being spewed out by Yellen and her ilk.
Don’t hold your breath. 99% of Uni students are not independent thinkers.
99% may be optimistic.
I see the merit in the hamster argument of 2%. People like raises even if they aren’t real. But for me and people who love gold (not me). I would think 0% inflation would be optimal. That way a dollar today is a dollar in my grandkids day and you would have a stable unit for accounting purposes over time.
I’m staggered you don’t like gold if that is your aim.
It may not track inflation perfectly but it will see you right in the long term.
But it wouldn’t necessarily be stable. If the supply of gold doesn’t increase with the level of production, then each unit would have to be able to buy more (deflation). Which means what you leave your grandchildren is worth more than it was to you. All for no actual work.
And every business would have to figure out how to cope with constantly lowering prices. Debt would have to be very short term and maybe indexed to deflation.
Who says the amount of money stays fixed, and that you can’t modify the quantity of money available? Getting it right would be the difficult part, but how to do it was not the question, what would be optimal inflation was the question.
On a strictly personal level, inflation doesn’t bother me. Too easily dealt with. Volatility of inflation is what I found to be a pain in the rear, once upon a time, but that was dealing with countries with very high and volatile inflation rates. Made doing long term deals a bi-tch, or at least more work.
“Which means what you leave your grandchildren is worth more than it was to you.”
Isn’t that the whole idea?
Productivity gains alone will mean that more can be available for less… for less work if you want.
The question of money is not how it “makes the economy work” , money is always secondary to economy, it should be based on avoiding economic failure, not in the sense of “buying success”, but in guaranteeing proper economic development. As there is no clear definition of the latter, it must be based on avoiding unwanted economic destruction. As individuals are arbiters of what counts as constructive or destructive, money should be simply left in the hands of people to decide with … not given to, just left to…people will create their own forms if it is lacking…no need to redistribute other people’s but if everyone agrees that too can be tried… people create their own “money” everyday, in word, and its worth is incalculable…won’t stop people trying to catch that of other people, but what they are actually more interested in is having you follow theirs…. ” 2% inflation” is sht boring to listen to though….why do we have this projected at us…should be banned for public disturbance by monotonous dictate.
I truly believe those who parrot the headline inflation statistics and argue that it’s not ‘robust’ enough have absolutely no conception of reality. As a retiree on a ‘fixed’ income I can tell you that my costs increase every year by about two to three times what I receive in cost-of-living pension ‘raises’ that reflect the official consumer price index of Canada. This is particularly true regarding: 1) my town’s municipal taxes that have increased between 3-6% every year for the past several years despite official cpi being less than 2%; 2) tuition costs for my daughters (I’ve seen tuition go up over 1000% in 35 years in our province); 3) housing (purchase prices in our area have increased about 500% in 20 years).
Official statistics are meaningless for the manipulation they undergo (hedonic ‘adjustments’ being the most egregious) and are merely a convenient tool used by the-powers-that-be to justify/rationalise their ongoing theft (for that is what inflation truly is).
Witch doctors desperately flailing about seeking relevancy while deflecting responsibility.
The Fed’s mandate is to raise rates so its master, the Big Banks, can enjoy bigger profits. Justifying those rate increases requires a modicum of inflation. Without it, rates will stay the same or move lower and the Big Banks will deem the Fed a failure. Beyond that, the Fed could care less what effect interest rates and inflation have on the economy. They are so fixated on serving the Banks, they are currently raising rates in the face of a collapsing 2/10 bond spread that signals a recession is around the corner.
QE broke the Fed. The Fed can increase the FFR but banks don’t necessarily have to borrow at that rate because of all the QE money sitting in its reserves. They don’t have to pay decent interest rates because they don’t need your deposits. The Fed can’t really raise interest rates until they unwind QE.
“The Fed can’t really raise interest rates until they unwind QE.”
…
The Fed can’t really raise interest rates. Period.
Too much debt. Raising rates raises servicing costs … digging deeper into disposable income. Economy barely moving as is. A substantial (another 100 bps?) rate increase will bring forward a (much needed) recession.
Time preference becomes now….people shouting “We want and we want now!” …. its called a command economy… just not the one they thought they would create.
Yellen should check the cover price of the Wall Street Journal. In recent years, it has gone up a lot more than 2% per year. So has the cost of a kilowatt of electricity at Pacific Gas & Electric, her former utility. She should also check the increases in property taxes around the country in recent years.
^THIS
Especially the point about property tax increases. The only people who want inflation at 2% (or greater) are the people in debt that want to pay back their obligations with cheaper money. The people in debt the most -by a trillion miles – are governments.
And government’s largest debt obligations are pensions and entitlements. They’ve been begging for higher inflation for the sole purpose of being able to pay those obligations with cheaper money. Without inflation they either have to cut entitlements or raise taxes – either of which means they will be voted out of office.
Therefore, the only people really wanting inflation are bureaucrats trying to keep their unproductive jobs.
We have a paradigm shift that no one fully understands. My 87 year old mother cannot grasp check cards vs checks. It is too foreign to her thinking. Economists worldwide are clinging to outdated economic models because they do not understand the new consequences of a global economy.
“inflation should move up to the Fed’s target of 2%.”
…
The Federal Reserve (with its current tools) is powerless to stop low inflation. ZIRP/NIRP/QE are disinflationary … ultimately deflationary when the asset bubbles invariably burst.
Until the massive debt overhang dealt with … we’re on autopilot.
Lael Brainerd – that “Dude Looks Like a Lady” to me.
CPI came in hot.
What did that do for real earnings (August)?
“Real average weekly earnings decreased 0.6 percent over the month due to the change in real average hourly earnings combined with a 0.3-percent decrease in the average workweek.”
https://www.bls.gov/news.release/realer.nr0.htm
Does that sound (ultimately) inflationary?
Sounds like a declining “standard of living” for the vast, vast majority.
The ONLY bank to be prosecuted for mortgage fraud after the sub-prime meltdown:
Frontline – Abacus: Small Enough to Jail
Sep 12, 2017
http://www.pbs.org/wgbh/frontline/film/abacus/
How do you spell “sacrificial lamb”? A-b-a-c-u-s.
” An expert is someone who knows more and more about less and less, until he/she knows everything about nothing “
First and foremost the inflation figures are deliberately fake numbers. The sycophant lapdogs in the media don’t question anything at all. Its like the monetary politburo is dictating what to say. Do we even have a free press anymore? The prime beneficiary is the govt themselves so they can keep financing free stuff to placate the masses without going bankrupt. Next in line are the financiers. There are plenty of alternate sites that measure true inflation and they are completely at odds with the fake numbers supplied by the monetary politburo. Anyone one who is a normal consumer will tell you inflation is much higher than stated.
The correct amount of inflation is zero. And that is measuring inflation the only meaningful way: The amount of base money in existence.
Increasing the amount of money over time due to one crackpot notion of “things are different now” or another, makes exactly as much sense as annually adding centimeters to the official meter, just because Americans’ waistlines are going up. Or because of The Beatles or something.
What the nominal price of something is in some currency, has nothing whatsoever to do with anything. The price of a burger today measured in dollars, is no more relevant than it’s price measured in lettuce heads. Or for that matter, it’s price measured in bumper stickers tomorrow.
All currencies provide, is a way to make relative and intertemporal price comparisons. The less their supply varies, the better they perform at serving that function. Just as the official meter, is a lot more useful if left alone, than if changed every couple of months by meetings between the governors of the Central Meter Board.
Any other “monetary policy” than this, has nothing at all to do with “improving the economy”, aka making it more efficient. And everything to do with stealing resources from some, in order to hand it to others. Full stop, 100%, no exceptions. Ever.
calm down> Deflation/falling prices ARE BAD…for who? Holders of DEBT!
That’s all you need to know. Who are biggest holders of debt? Governments and their banks. They are in charge, WE (the free market) are NOT!
Janet Yellen tried to take a victory lap, “no crash in my lifetime”, and despite all this negative press, where’s the fault in current fed policy? Growth is stable, inflation is stable, the argument over a half point here or there is moot. This is like listening to the Gold bugs, the price of gold is exactly where it was four years ago, but this last action is definitely a break out!!
There are zero signs of recession. Global liquidity is plentiful. As the BIS noted, a little deflation is good, while the fed is worried about runaway asset inflation, a cooling off in the housing market would be a welcome sign but we have been programmed to throw eggs at the Fed no matter what they say. Even Trump can’t get excited about it. It’s good to be Janet.
Measuring “consumer price deflation” “asset value deflation” CPI
As Mish has suggested a number of times, one of the more ‘important’ CPI components is OER – Owners Equivalent Rent – which is determined by asking sampled homeowners:
“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”
How many sampled homeowners have any idea how to answer this if they have not recently considered renting a home or their own home? Yet it is around 1/4 of the CPI.
Try to figure out why OER doesn’t make a bigger difference? I think it has to do with the lack of a national housing market. In high population centers home prices are up, but that number gets cancelled by the lack of price change in small rural markets, and they probably all get one vote like electoral college magic.
It may be time to dust off the term “the new normal” a reference created after the 2008 financial crisis to describe an economy mired in slow growth. The term has not been used much lately but has become the reality we face. Something that should make people concerned is that grinding stagflation is on the horizon.
A strong case can be made that the economy is about to stall under strong headwinds as the burden of past debts and future promises made to those retiring and unable to find good jobs begins to weigh heavily upon society. The article below delves into the idea of slow growth coupled with stagflation.
http://brucewilds.blogspot.com/2017/04/expect-slow-growth-coupled-with.html