Is a Change in the Trend of Consumer Price Inflation Looming?
Readers may recall our recent article “Inflation in the Nation”, where we commented on the recent jump in CPI to 2% annualized. As we noted, it is interesting that the economy's production structure has once again been markedly distorted by the Fed's inflationary policies, in particular, while capital goods production has revived strongly, consumer goods production has stagnated (see this chart for details). This would, ceteris paribus, favor an increase in consumer prices, or at least a shift in relative prices to the detriment of capital goods prices.
We also added a chart to a recent article by Bill Bonner, in which he discussed the growing gap between the MIT's 'Billion Prices Index' and CPI. Here is the most recent chart (unfortunately it only shows the situation up to the end of April, but the trend is clear even so):
The 'Billion Prices Index' (BPI) vs. CPI. There is now a growing gap between the two.
If we look at the history of the year-on-year change rates of the BPI vs. CPI, we can see that the former appears to lead the latter when divergences emerge (unfortunately the sample size is very small, so we have to take this information with a grain of salt).
The y/y change rates of BPI and CPI – last time a divergence was in evidence, BPI turned out to be the leading indicator.
The reason why we are discussing all this, is that Marty Feldstein recently uttered a warning in a WSJ editorial about growing 'price inflation' pressures, noting that the Federal Reserve appears to be 'behind the curve' (this is of course only natural – it always is, as it drives with its eyes firmly fixed on the rear-view mirror).
A Good Laugh at Feldstein's Expense?
A report published at Marketwatch, discusses Feldstein's warning. We certainly don't always agree with Mr. Feldstein's economic views, and we cannot say whether his prediction will turn out to be correct this time. However, something quite interesting happened after he issued his warning:
“Inflation is already rising faster than the Federal Reserve’s 2% target and presents a near-term challenge to the central bank, said legendary economist Martin Feldstein on Tuesday. Feldstein, now an economics professor at Harvard University, was in the running to replace Alan Greenspan for the top Fed spot in 2006.
In an op-ed in the Wall Street Journal, Feldstein said “the key to the future” is how the Fed will respond if prices continue above 2% annual target.
“A misinterpretation of labor-market slack, and a failure to create a positive real federal-funds rate, could put the economy on a path of rapidly rising inflation,” Feldstein wrote. Feldstein said the Fed’s rhetoric on inflation makes him worry that the central bank “may not react quickly and aggressively enough if inflation continues to rise above 2%.”
His views were greeted with some derision, like this tweet from Mark Thoma, a professor of economics at the University of Oregon.
(Surprise!!!) Warning: Inflation Is Running Above 2% – Martin Feldstein http://t.co/40ZQDkrOnc
- Mark Thoma (@MarkThoma) June 10, 2014
We don't know anything about Mark Thoma, but it seems to us that his derisive tweet is symptomatic for the currently quite widespread consensus that 'inflation is not a problem'. In fact, if anything, most economists are worried about 'inflation being too low', or are even fretting over the alleged 'threat' of deflation.
As Janet Yellen's reply to a question by Marty Feldstein on occasion of a recent appearance of hers reveals, this is also the consensus view at the Fed:
“Feldstein pressed Federal Reserve Chairwoman Janet Yellen on how the central bank would respond to higher inflation during her appearance before the New York Economic Club in April.
The Fed chairwoman replied “the risk is greater that we should be worrying about inflation undershooting our goal and getting inflation up to 2%.”
She added that the Fed “absolutely will be committed to protecting inflation if it threatens to rise persistently above 2%.”
As our readers know, our thinking about inflation is quite different from the mainstream's. To us, the term inflation is the designation for an increase in the money supply. Rising consumer prices are just one of many possible effects of money supply inflation, and the question of if and when money supply inflation will lead to rising consumer prices mainly depends on contingent circumstances. The only thing that is absolutely certain is that money supply inflation leads to a 'price revolution' across the entire economic system, as it leads to massive distortions of relative prices (which is incidentally the main reason why capital goods production has boomed while consumer goods production has stagnated).
So, is there an 'inflation problem'? Indeed, there is.
The 'inflation problem' illustrated – click to enlarge.
However, central banks only react to inflation if and when it begins to impact CPI. Should Mr. Feldstein's forecast turn out to be correct, it will certainly surprise the socks off a great many people. It would also be anathema to the current bubble in financial assets, as this bubble is predicated on the idea of administered interest rates remaining at zero for as far as the eye can see.
When warnings about inflation meet with ridicule, it may actually be a good time to take them seriously.
charts by MIT, St. Louis Fed
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
4 Responses to “Inflation Warnings Ridiculed”
Most read in the last 20 days:
- Speculative Blow-Offs in Stock Markets – Part 1
Defying Expectations Why is the stock market seemingly so utterly oblivious to the potential dangers and in some respects quite obvious fundamental problems the global economy faces? Why in particular does this happen at a time when valuations are already extremely stretched? Questions along these lines are raised increasingly often by our correspondents lately. One could be smug about it and say “it's all technical”, but there is more to it than that. It may not be rocket science, but...
- Speculative Blow-Offs in Stock Markets – Part 2
Blow-Off Pattern Recognition As noted in Part 1, historically, blow-patterns in stock markets share many characteristics. One of them is a shifting monetary backdrop, which becomes more hostile just as prices begin to rise at an accelerated pace, the other is the psychological backdrop to the move, which entails growing pressure on the remaining skeptics and helps investors to rationalize their exposure to overvalued markets. In addition to this, the chart patterns of stock indexes...
- India: Still the Fastest Growing Large Economy?
India’s Currency Ban - Part X It has now been four months since Narendra Modi declared about 86% of monetary value of currency illegal. Linked here is the last in my series of updates, which was written soon after the deadline to deposit the demonetized currency. Most of the banned currency was eventually deposited, making a mockery of Modi, who had claimed that unaccounted money would not reach the banks. Perhaps 3% of the cash never reached the banks. A cunning plan...
- Gold Sector: Positioning and Sentiment
A Case of Botched Timing, But... When last we wrote about the gold sector in mid February, we discussed historical patterns in the HUI following breaches of its 200-day moving average from below. Given that we expected such a breach to occur relatively soon, the post turned out to be rather ill-timed. Luckily we always advise readers that we are not exactly Nostradamus (occasionally our timing is a bit better). Below is a chart of the HUI Index depicting the action since the January...
- They're Worried You Might Buy Bitcoin or Gold - Precious Metals Supply and Demand
Bitcoin Mania The price of gold has been rising, but perhaps not enough to suit the hot money. Meanwhile, the price of Bitcoin has shot up even faster. From $412, one year ago, to $1290 on Friday, it has gained over 200% (and, unlike gold, we can say that Bitcoin went up — it’s a speculative asset that goes up and down with no particular limit). Bitcoins are a lot less tangible than this picture implies, but they are getting a lot of love recently...
- Welcome to Totalitarian America, President Trump!
Trump vs. the Deep State If there had been any doubt that the land of the free and home of the brave is now a totalitarian society, the revelations that its Chief Executive Officer has been spied upon while campaigning for that office and during his brief tenure as president should now be allayed. Image adapted from the cover of “Deep State #5” - depicting an assassin from the future President Trump joins the very crowded list of opponents of the American...
- The Long Run Economics of Debt Based Stimulus
Onward vs. Upward Something both unwanted and unexpected has tormented western economies in the 21st century. Gross domestic product (GDP) has moderated onward while government debt has spiked upward. Orthodox economists continue to be flummoxed by what has transpired. What happened to the miracle? The Keynesian wet dream of an unfettered fiat debt money system has been realized, and debt has been duly expanded at every opportunity. Although the fat lady has so far only...
- Boosting Stock Market Returns With A Simple Trick
Systematic Trading Based on Statistics Trading methods based on statistics represent an unusual approach for many investors. Evaluation of a security's fundamental merits is not of concern, even though it can of course be done additionally. Rather, the only important criterion consists of typical price patterns determined by statistical examination of past trends. Fundamental considerations such as the valuation of stocks are not really relevant to the statistics-based trading...
- Searching for Truth
Heresy or Truth? RANCHO SANTANA, NICARAGUA – In the fifth century, Christian scholars counted 88 different heresies. Arianism. Eutychianism. Nestorianism. If there was a way to “offend” God, they had a name for it. One group of “heretics” argued that there was no such thing as “original sin.” Another denied the trinity. And another claimed Jesus was not divine. Which one had the truth? Depiction of the first Council of Ephesus in 431 AD, convened by Emperor...
- Why the 21st Century Sucks - Turtles All the Way Down
A Truly Sucky Century BALTIMORE – What an awful century! Worst we’ve ever seen. Household incomes are down. Employment is down, with 7 million people in the U.S. of working age without jobs. Productivity growth is down. GDP growth is down – to only about 0.5% per capita last year. Even life expectancies are down. Drug overdoses are up. Suicides are up. One out of every eight children lives in a family getting food stamps. One of out every eight adults takes psychoactive drugs...
- Gold and the Fed's Looming Rate Hike in March
Long Term Technical Backdrop Constructive After a challenging Q4 in 2016 in the context of rising bond yields and a stronger US dollar, gold seems to be getting its shine back in Q1. The technical picture is beginning to look a little more constructive and the “reflation trade”, spurred on further by expectations of higher infrastructure spending and tax cuts in the US, has thus far also benefited gold. From a technical perspective, there are indications that the low at $1045.40,...
- India: The next Pakistan?
India’s Rapid Degradation This is Part XI of a series of articles (the most recent of which is linked here) in which I have provided regular updates on what started as the demonetization of 86% of India's currency. The story of demonetization and the ensuing developments were merely a vehicle for me to explore Indian institutions, culture and society. The Modimobile is making the rounds amid a flower shower. [PT] Photo credit: PTI Photo Tribal cultures face...