The amount of sheer nonsense written about inflation expectations is staggering.
Let’s take a look at some recent articles before making a mockery of them with a single picture.
Expectations Problem
On July 17, 2017, Rich Miller writing for Bloomberg proclaimed The Fed Has an Inflation Expectations Problem.
Expectations matter because they shape how households and companies act and thus can go a long way in determining where inflation actually ends up. Consumers accustomed to meager inflation will resist paying up for goods and services.
“Lower inflation expectations make it all the more difficult for the central bank to achieve its inflation objective,” Charles Evans, president of the Chicago Fed, said in remarks posted on the bank’s website on July 14.
Key Element
The Business Insider says The Fed is missing a key sign of economic weakness coming from American consumers.
Andrew Levin, a career Fed economist who was a special adviser to Fed Chairman Ben Bernanke, told Business Insider he was worried by a noticeable decline in inflation expectations, both as reflected in consumer surveys and bond-market rates.
“The reality is that the longer-term inflation expectations of consumers and investors have shifted downward by about a half percentage point. Thus, even with the economy moving towards full employment, it’s not surprising that core PCE inflation remains about a half percentage point below the Fed’s inflation target,” he said, referring to a closely watched reading indicator that excludes food and energy costs.
“If the FOMC continues to ignore the downward drift in inflation expectations and simply proceeds with its intended path of policy tightening, actual inflation is likely to keep falling short of the Fed’s target and might well decline even further,” he said.
Janet Yellen Yesterday
In a brief speech following yesterday’s FOMC announcement Janet Yellen made these statements.
Turning to inflation, the 12-month change in the price index for personal consumption expenditures was 1.4 percent in July, down noticeably from earlier in the year.
For quite some time, inflation has been running below the committee’s 2 percent longer-run objective.
One-off reductions earlier this year in certain categories of prices such as wireless telephone services are currently holding down inflation, but these effects should be transitory.
Such developments are not uncommon, and as long as inflation expectations remain reasonably well anchored, are not of great concern from a policy perspective because their effects fade away.
Complete Nonsense
One can find thousands of such references, all of them idiotic. Let’s prove that with a single picture and a few comments.
CPI Percentage Weights
The idea behind inflation expectations is that if consumers think prices will go down, they will hold off purchases and the economy will collapse. The corollary is that is consumers think inflation will rise, they will rush out and buy things causing the economy to overheat.
With that backdrop, let’s have a Q&A. I believe the answers are obvious in all cases.
Inflation Expectations Q&A
Q: If consumers think the price of food will drop, will they stop eating out?
Q: If consumers think the price of food will drop, will they stop eating at home?
Q: If consumers think the price of natural gas will drop, will they stop heating their homes and stop cooking to wait for the event.
Q: If consumers think the price of gas will drop, will they stop driving or not fill up their car if it is running on empty?
Q: If consumers think the price of gas will rise, can they do anything about it other than fill up their tank more frequently?
Q: If consumers think the price of rent will drop, will they hold off renting until that happens?
Q: If consumers think the price of rent will rise, will they rent two apartments to take advantage?
Q: If consumers think the price of plane tickets, taxis, and bus tickets will drop, will they hold off taking the plane the train or the bus?
Q: If consumers think the price of plane tickets, taxis, and bus tickets will rise, will they rush out and buy multiple tickets driving the prices even higher up?
Q: If people need an operation, will they hold off if they think prices might drop next month?
Q: If people need an operation, will they have two operations if they expect the price will go up?
All of the above questions represent inelastic items. Those constitute 80.254% of the CPI. Commodities other than food and energy constitute the remaining 19.746% of the CPI. Let’s hone in on that portion with additional Q&A.
Q. If someone needs a refrigerator, toaster, stove or a toilet because it broke, will they wait two months if for some reason they think prices will decline?
Q. If someone does not need a refrigerator, toaster, stove or a toilet will they buy one anyway if they think prices will jump?
Q. The prices of TVs and electronics drop consistently. Better deals are always around the corner. Does that stop people from buying TVs and electronics?
Q. If people thought the price of TVs was about to jump, would they buy multiple TVs to take advantage?
For sure, some people will wait for year-end clearances to buy cars, but most don’t. And if a car breaks down, consumers will fix it immediately, they will not wait for specials.
Stupidity Well Anchored
The only thing that’s “well anchored” is the stupidity of the belief that inflation expectations matter.
Asset Irony
People will rush to buy stocks in a bubble if they think prices will rise. They will hold off buying stocks if they expect prices will go down.
People will buy houses to rent or fix up if they think home prices will rise. They will hold off housing speculation if they expect prices will drop.
The very things where expectations do matter are the very things the Fed and mainstream media ignore.
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. She’s also correct. Yet, she proposes to know what to do about it! How idiotic is that?
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
Inflation encourages speculation. From what I read, speculation is now our primary “industry”.
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….And the mechanism by which it encourages speculation, is by transferring money to those who cluelessly and idly speculate. From those who produce. Incentivizing the former, disincentivizing the latter. AKA robbing producers to pay off speculators.
The way the systematic theft is attempted covered up, is by overlaying a thin veneer of pseudo randomness over the outcomes. So that the gullible and less than intellectually astute, can be fooled into believing some degree of value adding skill or aptitude helps determine the outcomes of the speculation.
That way, the banksters and other connecteds that share in the proceeds of the systematic looting, can be attempted passed off as “smart.” Or “good at” something. Instead of being recognized for the completely average, just privileged, beneficiaries of nothing more than the crassest and simplest form of theft, that they in reality are.
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In the last decades, but starting with Greenspan, all financial instruments that once served some purpose in real economy have become mainly tools of pure speculation. Check it out: futures, forex, you name it.
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I don’t know…. I don’t think like other people I meet on some things… dah ya u know…. but when I see prices going up on something I get this feeling that says “they are after all your money, stay away stay away “. So I stand my ground and purposefully miss out and smile right back….and it works! because I’m still smiling and the rest are all tied up trying to figure what exactly anything is that it was.
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Hi Mish,
First of all, in the event of hyper inflation, if all other options are exhausted, people will rush to stores and buy multiple TVs, fridges, toasters etc.
Only for a few weeks before they run out of money and then the demand will collapse. At the end, doesn’t matter, but people who bought merchandise will feel stupid because they bought rapidly depreciating consumer goods, not really any liquid asset protection. They’ll learn and smash themselves with a frying pan a few times and not do this again.
We’ve seen that in Russia when ruble was sharply devalued against USD and other currencies in the end of 2014.
Second, we all know that the theory of inflation being beneficial for economy/employment/people/… is a bunch of nonsense and is just a rhetoric to cover up the real agenda: inflation is beneficial for governments (more taxes in, less value out to pay debts off) and banks (they create most of the money in circulation which is basically an inflation, plus they get the newly created units of currency before anyone else).
So, no need to expose nonsense, it’s clear then the real reason for this inflation targeting is politicians and banks out of control.
Economists on payroll of the government or FED or banks are sort of reporters from Pravda news paper who just broadcast nonsense being pushed by their masters.
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Yes, hyperinflation or extremely high inflation is the only time inflation expectations matter.
I have mentioned that before, jut not in that article.
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CPI is a benchmark statistic, it is not inflation.
Please stop confusing two different things (yes, I know the idiots in Eccles building started it, but that doesn’t make it right)
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What about wage inflation.
If you get a wage increase will you likely purchase a better car or go on a holiday.
If you have a wage decrease will you likely keep the old car for longer or stay at home next holiday.
Unfortunately, as governments interfere by increasing the minimum wage, you get price inflation.
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Short term, inflation expectations have little impact. For longer term, it does. If you expect high inflation, you are more apt to buy a house. If you expect deflation, you are more apt to rent. If you expect dramatically higher gas prices, you are more apt to buy an electric car, or at least a more fuel efficient model. Similarly, businesses are more apt to make capital purchases in a high inflation environment – buy the equipment before the price goes up, save the labor before the labor price goes up.
As for deflation, I agree that it is not inherently bad, however, if there really was long term deflation, it would pose new and difficult management challenges. Just imagine the excitement when you call employees in for their annual pay cut, for example.
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If someone put me in the fed and markets hung on my every word and I wanted to keep my job I would pontificate just like they do. That’s what politicians do when they have no idea what to do. They are the antithesis of chicken little.
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My first (and last) presentation would go like this :
” Ladies, gentlemen,others…. [blurbyblurbblurb]…therefore we have decided to raise rates by 4% immediately. I understand this is beyond expectations but we would otherwise be forced to implement our secondary plan and limit cash withdrawals. Good riddance. “
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– People use the words “Inflation Expectations” to rationalize movements in interest rates they don’t understand and can’t explain. The best explanation for rising and falling interest rates comes from Michael Pettis.
– If you combine Steve Keen’s info with info provided by Gary Shilling then one understands why since say 1980/1981 (price) inflation remained low to very low all those years. But even Shilling confuses Inflation with Deflation.
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Didn’t see the cost of insurance, medical, car, house or flood on the pie chart. Didn’t see the cost of education or the ACA deductibles that are killing discretionary spending. There are a lot of things they ignore that have 8% inflation tied to them.
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They’re included under the respective services.
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I wonder how they do a hedonistic adjustment for college costs. Do they just pretend everyone goes to community college?
Same goes for health insurance. Isn’t everyone guaranteed a Cadillac plan now?
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“Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.”
Yes it is. The Fed intervenes in interest rates, which is a price, and keeps them below the market rate during times of crisis. Central Banks operate under the assumption you can plan an economy, and that consumption drives growth.
There is also the elephant in the room that nobody talks about and that is the target inflation rate of 2%. Why would the central banks have a built in target to devalue the currency and destroy the average person’s’ purchasing power over the long-run? Out of control government spending that is a silent tax on society. Government bonds sold can be devalued over the long-run at a rate subject to the central bank spigot. Government financing through an indirect tax by monetary devaluation is the real reason central banks exist. It’s the ultimate ruse played on the average citizen that ultimately impacts those who can least afford it.
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“Why would the central banks have a built in target to devalue the currency and destroy the average person’s’ purchasing power over the long-run?” And reduction of every one’s labor remuneration. And, the remuneration does not recover by itself. This is why many countries’ people make less than other less currency dilluting countries.
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Mish is missing one important point concerning the importance of “low inflation expectations”.
The fact remains that this idiotic, debt-based bass-ackwards economy depends NOT on whether “low inflation expectations” will deter consumers from buying potatoes or cabbage.
What they have to actually do, in an economy which needs “economic growth”, is buy stuff they don’t actually need or can’t (absent cheap money manipulation) afford. Houses, cars, quad bikes, poodle grooming, luxury goods, expensive organic foods, upscale restaurants, hotels and vacations, tech gadgetry…whatever… These are the high-profit, high “value-added” frivolities re: which the Fed is watching spending.
And, better yet, a good consumer is expected to fill any void in inability to pay with debt.
No one gets rich from – or sells debt to – consumers who buy cans of baked beans and essentials. (That is NOT the way a healthy economy SHOULD work, but ours is not healthy).
The idea is to keep the shrinking proportion of big spenders spending…
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I would like to point out that when I was 19, I didn’t eat for about a month, because of money limitations (I worked Burger King, but they paid biweekly). Because of that, I seem to be subject to Non-alcoholic fatty liver disease.
Point being, if any of you are not eating because you think the price of food might drop, you’re only increasing your medical bills; so you might as well go back to eating normally.
Thank you, Mish, for the forum. I didn’t want any guest viewers to get the wrong idea, especially if they believe in the Fed.
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I heard Mexico has a mouthwatering inflation for these dudes. Can they be shipped to Mexico to enjoy all the benefits of it?
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Not a good idea, they might return having learnt how its done.
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The Mexican peso is getting stronger.
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Mish,
Big week for you. All good. Interview with Greg Hunter was clearly articulated and impactful. Anyone who watched could follow your logic easily and surely learned a lot. As an added benefit, I learned about your interest in photography and saw your photos. In particular I loved the action dance photos stunning. I had a daughter who was in the same sort of group photos you displayed. A great memory here of my little ballerina! Then, this article about inflation well done! Why do seemingly intelligent people agree that even 2% inflation is good. You didn’t mention it, but I think they are morons too. Hunter commented how difficult it is to write every day let alone several times a day as you do. Those of us who write know how true it is.
I hope your insights find ever increasing audiences. Thank you for providing them.
BTW you and Max do a great show too.
Wayne
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The 50%-spike of car sales in 2009 was stimulated not by the inflation expectations (which, actually, were much higher at that time), but rather by large incentives from the government which helped to reduce the final price.
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Mish, i think you are missing the point. The Fed members are bright and are as aware of this as you are. However, they are subservient to the monied elite and continue the charade so long as the elite can skim wealth off the ignorant populace. The financial issues you so correctly identify are not resolved by reason because they are not subject to reason. they are only subject to the self interest of the monied elite. Barzun states in From Dawn to Decadence that there has not ever been a successful revolution that was not supported by a segment of the existing power structure. Things will only change when a segment of the monied elite is benefitted by the chane.
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Lael Brainard is a woman.
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The reason the government wants inflation is because it enables them to deficit-spend with reckless abandon, to buy votes, and inflate-away the consequences, in effect stealing the money from savers.
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No matter what, the CPI has to be measured low. Otherwise, the governments financial situation would get even worse. They need to keep transfer payments low and many are linked to the inflation rate. If social security COLAs realistically matched inflation, it would be lights out for the federal budget. If CPI adjustments to the GDP were accurate, we would have been in a decade long depression.
The only way we’ll have rapid inflation is if the USD collapses and the rest of the world doesn’t intervene. Not likely.
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Inflation is never a good idea, look at Zimbabwe
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“Expectations matter because they shape how households and companies act and thus can go a long way in determining where inflation actually ends up. Consumers accustomed to meager inflation will resist paying up for goods and services.”
People without money resist paying up for goods and services, as they don’t have the money to pay up for goods and services. The homeless population of Los Angeles has risen over 20% in the past year, in part because more people can’t afford the rising cost of rent.
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The stupidest thing was Yellen saying cell phone service deflation is a transitory one-off. The cost of cell-phone service has been dropping for years!
There will be a bottom in cell phone service costs to consumers, some day. But it is doubtful that it will be reached in a year or two unless there is some sudden consolidation in the industry that forces prices up.
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“history and logic both show that concerns over consumer price deflation are seriously misplaced”
Of course, because it’s all a ruse.
Isn’t it a very strange coincidence that the areas of average citizen consumption where deflation “must” be avoided by attempting to spur inflation has a NEGATIVE effect for those citizens while at the same time artificially inflating investments made by the actual owners of governments and through housing bubbles increasing government property tax receipts?
So, not only is inflation a hidden tax which benefit governments, the side effects of the attempt to generate inflation benefit the real owners of governments who are, BTW, NOT the masses who merely vote and who most certainly, whether they vote or not, have absolutely no control whatsoever on the asinine Keynesian policies which massively transfer wealth.
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Look at the pie chart. Med care is about 18% of US GDP but less than 7% of CPI. Totally disconnected from reality. How the heck does that work? Lies upon lies stacked upon more lies upon which crucial policy decisions depend…
Your government working for you.
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FED most important job is to CON :
1) Investors.
2) The rest of us,
about the threat of inflation.
They shifted “money” from their right pocket to their left, but the “money” stayed in the FED pocket.
Did it work ?
Yes !
But you can’t get all you want.
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One only has to look to the Burrito Index for real inflation. All the Fed puts out is bull.
“The Burrito Cost”
1/2001 – $2.50
1/2016 – $6.50
8/2017 – $7.10
Inflation 6.5%
Go figure …Lies are the Gov best export.
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