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Posts Tagged ‘price inflation’

Why the Fed Is So Desperate to Hide Price Inflation

Posted by M. C. on September 9, 2021

Otherwise, as noted earlier, rising interest rates would collapse the debt pyramid and result in a collapse in output and employment. It is, therefore, no wonder that the Fed is doing whatever it can to hide the inflationary consequences of its policy from the public:

Thorsten Polleit

Speaking at the Jackson Hole meeting on August 27, 2021, Federal Reserve (Fed) chairman Jerome J. Powell indicated that he supported “tapering” toward the end of this year and hastened to add that interest rate hikes are still a long way off. The term “tapering” means that the central bank reduces its monthly purchases of bonds and slows down the monthly increase in the quantity of money accordingly. In other words, even with tapering, the Fed will still churn out newly printed US dollar balances, but to a lesser extent than before; that is, it will still cause monetary inflation, but less than before. 

Financial markets were not alarmed by the Fed’s announcement that it might take its foot off the accelerator pedal a little: ten-year US Treasury yields are still trading at a relatively low level of 1.3 percent, the S&P 500 stock index hovers around record highs. Could it be that investors do not believe in the Fed’s suggestion that tapering will begin soon? Or is tapering of much lower importance for financial market asset prices and economic activity going forward than we think? Well, I believe the second question nails it. To understand this, we need to point out that the Fed has put a “safety net” under financial markets.

As a result of the politically dictated lockdown crisis in early 2020, investors feared a collapse of the economic and financial system. Credit markets, in particular, went wild. Borrowing costs skyrocketed as risk premiums rose drastically. Market liquidity dried up, putting great pressure on borrowers in need of funding. It wasn’t long before the Fed said it would underwrite the credit market, that it would open the monetary spigots and issue all the money needed to fund government agencies, banks, hedge funds, and businesses. The Fed’s announcement did what it was supposed to do: credit markets calmed down. Credit started flowing again; system failure was prevented.

tp

In fact, the Fed’s creation of a safety net is nothing new. It is perhaps better known as the “Greenspan put.” During the 1987 stock market crash, then Fed chairman Alan Greenspan lowered interest rates drastically to help stock prices recover—and thus set a precedent that the Fed would come to rescue in financial crises. (The term “put” describes an option which gives its holder the right, but not the obligation, to sell the underlying asset at a predetermined price within a specified time frame. However, the term “safety net” might be more appropriate than “put” in this context, as investors don’t have to pay for the Fed’s support and fear an expiry date.)

The truth is that the US dollar fiat money system now depends more than ever on the Fed to provide commercial banks with sufficient base money. Given the excessively high level of debt in the system, the Fed must also do its best to keep market interest rates artificially low. To achieve this, the Fed can lower its short-term funding rate, which determines banks’ funding costs and thus bank loan interest rates (although the latter connection might be loose). Or it can buy bonds: by influencing bond prices, the central bank influences bond yields, and given its monopoly status, the Fed can print up the dollars it needs at any point in time.

Or the Fed can make it clear to investors that it is ready to fight any form of crisis, that it will bail out the system “no matter the cost,” so to speak. Suppose such a promise is considered credible from the financial market community’s point of view. In that case, interest rates and risk premiums will miraculously remain low without any bond purchases on the part of the Fed. And it is by no means an exaggeration to say that putting a safety net under the system has become perhaps the most powerful policy tool in the Fed’s bag of tricks. Largely hidden from the public eye, it allows the Fed to keep the fiat money system afloat.

The critical factor in all this is the interest rate. As the Austrian monetary business cycle theory explains, artificially lowering the interest rate sets a boom in motion, which turns to bust if the interest rate rises. And the longer the central bank succeeds in pushing down the interest rate, the longer it can sustain the boom. This explains why the Fed is so keen to dispel the notion of hiking interest rates any time soon. Tapering would not necessarily result in an immediate upward pressure on interest rates—if investors willingly buy the bonds the Fed is no longer willing to buy, and/or if the bond supply declines.

But is it likely that investors will remain on the buy side? On the one hand, they have a good reason to keep buying bonds: they can be sure that in times of crisis, they will have the opportunity to sell them to the Fed at an attractive price; and that any bond price decline will be short lived, as the Fed will correct it quickly. On the other hand, however, investors demand a positive real interest rate on their investment. Smart money will rush to the exit if nominal interest rates are persistently too low and expected inflation persistently too high. The ensuing sell-off in the bond market would force the Fed to intervene to prevent interest rates from rising.

Otherwise, as noted earlier, rising interest rates would collapse the debt pyramid and result in a collapse in output and employment. It is, therefore, no wonder that the Fed is doing whatever it can to hide the inflationary consequences of its policy from the public: the steep rise in consumer goods price inflation is being dismissed as only “temporary”; asset price inflation is said to be outside the policy mandate, and the impression is given that increases in stock, housing, and real estate prices do not represent inflation. Meanwhile, the increase in the money supply—which is the root cause of goods price inflation—is barely mentioned.

However, once people begin to lose confidence in the Fed’s willingness and ability to keep goods price inflation low, the “safety net trickery” reaches a crossroads. If the Fed then decides to keep interest rates artificially low, it will have to monetize growing amounts of debt and issue ever-larger amounts of money, which, in turn, will drive up goods price inflation and intensify the bond sell-off: a downward spiral begins, leading to a possibly severe devaluation of the currency. If the Fed prioritizes lowering inflation, it must raise interest rates and reign in money supply growth. This will most likely trigger a rather painful recession-depression, potentially the biggest of its kind in history.

Against this backdrop, it is difficult to see how we could escape the debasement of the US dollar and the recession. It is likely that high, perhaps very high, inflation will come first, followed by a deep slump. For inflation is typically seen as the lesser of two evils: rulers and the ruled would rather new money be issued to prevent a crisis over allowing businesses to fail and unemployment to surge dramatically—at least in an environment where people still consider inflation to be relatively low. There is a limit to the central bank’s machinations, though. It is reached when people start distrusting the central bank’s currency and dumping it because they expect goods price inflation to spin out of control.

But until this limit is reached, the central bank still has quite some leeway to continue its inflationary policy and increase the damage: debasing the purchasing power of money, increasing overconsumption and malinvestment, and making big government even bigger, effectively creating a socialist tyranny if not stopped at some point. So, better stop it. If we wish to do so, Ludwig von Mises (1881–1973) tells us how: “The belief that a sound monetary system can once again be attained without making substantial changes in economic policy is a serious error. What is needed first and foremost is to renounce all inflationist fallacies. This renunciation cannot last, however, if it is not firmly grounded on a full and complete divorce of ideology from all imperialist, militarist, protectionist, statist, and socialist ideas.”1

  • 1. Ludwig von Mises, “Stabilization of the Monetary Unit–from the Viewpoint of Theory (1923),” in The Cause of the Economic Crisis. And Other Essays before and after the Great Depression, edited by Percy L. Greaves Jr. (Auburn, AL: Ludwig von Mises Institute, 2006), p. 44, appendix.

Author:

Thorsten Polleit

Dr. Thorsten Polleit is Chief Economist of Degussa and Honorary Professor at the University of Bayreuth. He also acts as an investment advisor.

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This Is a Sign that Price Inflation Will Soon Get Worse | Mises Wire

Posted by M. C. on September 4, 2021

Slowly, but surely, the public began to realize: “We have been waiting for a return to the good old days and a fall of prices back to 1914. But prices have been steadily increasing. So it looks as if there will be no return to the good old days. Prices will not fall; in fact, they will probably keep going up.” As this psychology takes hold, the public’s thinking in Phase I changes into that of Phase II: “Prices will keep going up, instead of going down. Therefore, I know in my heart that prices will be higher next year.” The public’s deflationary expectations have been superseded by inflationary ones.

https://mises.org/wire/sign-price-inflation-will-soon-get-worse

Connor Mortell

Recently here on Mises Wire, Sammy Cartagena wrote a brilliant article demonstrating that Two Percent Inflation Is a Lot Worse Than You Think. In it, he demonstrates that the manageable 2 percent inflation year over year we all have gotten used to is a whole lot less manageable than we tend to think. But in it, he also cited explaining that “over 23 percent of all dollars in existence were created in 2020 alone.” From that he explains that while future inflation is important, he is focused on past inflation for the sake of his article, which is where these two articles diverge because this will be questioning future inflation. Anyone paying attention has seen that there has obviously been inflation this past year whether through price increases or more subtle ways to sneak inflation into the economy. However, when we look at the massive spending bills and the aforementioned fact that over 23% of dollars have just recently been ushered into existence, it leaves many asking why has there not been proportionally drastic inflation?

The major piece that is holding back even more inflation than we’ve already seen is a public expectation of a return to normal. The economy is exceedingly complicated and there are countless causal factors effecting this so I cannot say this is the only reason, but we can turn to The Mystery of Banking where we see Murray Rothbard go as far as claiming that “Public expectation of future price levels” is far and away the most important determinant of the demand for money. Rothbard goes on to cite his intellectual predecessor – Ludwig von Mises – to explain just how strongly expectations played a role in the German hyperinflation in 1923:

The German hyperinflation had begun during World War I, when the Germans, like most of the warring nations, inflated their money supply to pay for the war effort and found themselves forced to go off the gold standard and to make their paper currency irredeemable. The money supply in warring countries would double or triple. But in what Mises saw to be Phase I of a typical inflation, prices did not rise nearly proportionately to the money supply. If M in a country triples, why would prices go up by much less? Because of the psychology of the average of the average German, who thought to himself as follows: “I know that prices are much higher now than they were in the good old days before 1914. But that’s because of wartime, and because all goods are scarce due to diversion of resources to the war effort. When the war is over, things will get back to normal, and prices will fall back to 1914 levels.” In other words, the German public originally had strong deflationary expectations. Much of the new money was therefore added to cash balances and the Germans’ demand for money rose. In short, while M increased a great deal, the demand for money also rose and thereby offset some of the inflationary impact on prices.

As Rothbard explains, prices not rising in proportion to a radical increase in the money supply is not only understandable, it is actually to be expected. Sure, this current situation is not a wartime economy, however, as far as Rothbard’s explanation of the psychology of the average person goes, it is not all too different from the expectations during the war. Today the psychology of the average American leads to him thinking to himself “I know that prices are much higher now than they were in the good old days before 2020. But that’s because of the pandemic, and because all goods are scarce due to the unemployment from people who had to stay home during this dangerous time. When the pandemic is over, things will get back to normal, and prices will fall back to 2019 levels.” The problem with this expectation is that it cannot last forever. As Rothbard explains

Slowly, but surely, the public began to realize: “We have been waiting for a return to the good old days and a fall of prices back to 1914. But prices have been steadily increasing. So it looks as if there will be no return to the good old days. Prices will not fall; in fact, they will probably keep going up.” As this psychology takes hold, the public’s thinking in Phase I changes into that of Phase II: “Prices will keep going up, instead of going down. Therefore, I know in my heart that prices will be higher next year.” The public’s deflationary expectations have been superseded by inflationary ones.

Rothbard explains that these new expectations will intensify the inflation rather than holding it back. Rothbard also claims that there is no way of knowing when these expectations will finally shift because so many cultural, technological, geographical, and other factors affect any given population. As a result, we unfortunately can’t say when modern Americans will realize that prices are not headed back to their pre-pandemic levels and start having intensifying expectations. But however long it does take, the last point that we have to remember from Rothbard is his claim that “When expectations tip decisively over from deflationary, or steady, to inflationary, the economy enters a danger zone. The crucial question is how the government and its monetary authorities are going to react to the new situation.” While it is too late to not have created all that new money supply, when the day does come that we enter that danger zone, it is not too late for us to react appropriately and avoid that final phase III of hyperinflation but rather allow for a healthy deflationary bust allowing the economy to recover as it so desperately needs. Author:

Connor Mortell

Connor Mortell graduated from Texas Christian University with a BBA in finance, minoring in Chinese language and culture. After graduation he worked as a legislative aide in the Florida House of Representatives for just shy of two years. Currently he is an MBA student at Florida State University. As well he will be attending Mises University in summer 2021.

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EconomicPolicyJournal.com: 7 Product Categories Being Slammed by Price Inflation

Posted by M. C. on May 22, 2021

https://www.economicpolicyjournal.com/2021/05/7-product-categories-being-slammed-by.html

The cost of grocery items has climbed 2.4% overall in the last year, but the jump in retail meat prices has been much more dramatic. Compared to April 2020, pork prices are up 11%, bacon prices are up 16.3%, and beef prices are up 4.8%. Poultry prices are 11% higher than last year. The price for wings, which hit a record $2.92 per pound is 180% higher than they were in early 2020. 

After hitting historic lows in 2020, the average price of a gallon of gasoline in the U.S. has risen above $3 for the first time since 2014, according to the AAA.

House price bids are coming in above the asking price, sight unseen. The average house is up 33.9% on a year-on-year basis.

The price for lumber has soared by 377% in the last year, adding as much as $36,000 to the price of a newly built home.

 Retail prices for electronics have recently started to climb, too, led by the price of big screen TVs, which are 30% more expensive than they were last year. 

Used cars and truck prices increased by 10% just last month, and are up 21% over the last 12 months.

The price of renting a car was up 16.2% last month.

It is only the beginning folks, there is much more to come, especially if the Federal Reserve continues its mad money printing.   –RW
(via LifeHacker)

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EconomicPolicyJournal.com: Now, The New York Times is Warning About Coming Price Inflation

Posted by M. C. on March 24, 2021

Now, as a sidebar, comes the woke cultural-Marxist moment in the Sahm essay which is apparently required in any opinion piece these days at the Times:

The Fed is still learning. In the late 2010s, I helped with some of that introspection. We asked ourselves whether we were producing our best work or if we were succumbing to groupthink. We grappled with why we missed the 2008 financial crisis, why we ignored the warning signs and how to do better next time.

Still trying to figure out inflation 111 years later.

https://www.economicpolicyjournal.com/2021/03/now-new-york-times-is-warning-about.html

 The word is obviously out to play down the accelerating price inflation that is developing. 

Yesterday The New York Times columnist Paul Krugman played down the coming inflation (See: It’s Time to Panic: The Paul Krugman “Don’t Panic” Indicator Just Kicked In).

Now Claudia Sahm, a Times contributing opinion writer who once worked as an economist at the Federal Reserve, is out with a column that claims price inflation is good for lower-income people! 

She starts out with the puff-piece-style claim that Federal Reserve Chairman Jerome Powell and the Federal Reserve Bank staff are simply great:

[W]ith Jerome Powell as the leader of our nation’s central bank. The swift and steady action from the Fed, a commitment to getting people safely back to work and Mr. Powell’s calm-inducing pronouncements have earned him plenty of bipartisan credit. (There’s now even a wide cross-section of progressives who have become fans of his.) That said, Mr. Powell is not the only hero. The long, hard path to get a more worker-friendly Fed was generations in the making.

Then there is this absurd claim to justify coming inflation:

Inflation hawks seldom remind us that wealthy investors are hurt by inflation and lower-income borrowers are helped: For example, paying off a fixed-rate loan is easier when wages and prices rise by, say, 5 percent a year rather than 2 percent. People have more money to pay the debt, and when creditors get their money back, it’s worth less. When framed this way, zealously guarding against any significant uptick in inflation feels less like responsible stewardship and more like a classist double whammy — increased cost of debt and fewer jobs.

First of all, you can’t believe in simple supply and demand economics if you think that price inflation is required to create jobs. Markets clear, even jobs markets.

As for the benefit of fixed-income debt during a period of strong inflation, it is true that there is a benefit for the holders of such debt. But Sahm is very misleading in her phrasing of who benefits. 

“Lower-income” borrowers with fixed debt do benefit but the lowest income debt holders have adjustable-rate debt, not fixed debt. As inflation climbs and interest rates go up, they are squeezed, especially if they are on fixed incomes. And every major corporation in America today has issued massive amounts of fixed-rate corporate debt that will benefit to a much greater extent than a low-income individual.

Now, as a sidebar, comes the woke cultural-Marxist moment in the Sahm essay which is apparently required in any opinion piece these days at the Times:

The Fed is still learning. In the late 2010s, I helped with some of that introspection. We asked ourselves whether we were producing our best work or if we were succumbing to groupthink. We grappled with why we missed the 2008 financial crisis, why we ignored the warning signs and how to do better next time.

Among the fruits of this labor was an analysis conducted in 2015 exploring whether the staff consensus was underestimating how many more jobs the economy could create without sparking too much inflation. We also tried to tackle groupthink by trying to increase diversity among the staff, under Ms. Yellen and later Mr. Powell. And I am heartened by the changes so far. But even today what’s known as the “staff view” looms large, and only a handful of the hundreds of economists at the Federal Reserve Board are Black economists.

And then the Sahm conclusion which falls in line with Krugman to ignore the coming price inflation and warnings about it:

If you think the hawks on television and Twitter are loud now, just wait until they see a temporary uptick in prices. They’ll be deafening. Some are inside the Fed itself and will be voting on its policies. That said, there are also many wonks at the Fed who have spent a decade shoring up technical defenses against outdated inflation fears.

But their words in long-winded memos are not enough. Good intentions are not enough. It’s what the Fed does this year and the next — in the face of inevitable criticism from incredibly powerful voices stuck in the past — that will ultimately matter most.

There you have it another New York Times voice attempting to play down the coming price inflation.

LOL, “outdated inflation fears” as the inflation tsunami is about to hit.

 –RW

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EconomicPolicyJournal.com: Executive Editor of News for Bloomberg Digital: We Need More Monetary Inflation to Fight Price Inflation

Posted by M. C. on February 6, 2021

https://www.economicpolicyjournal.com/2021/02/executive-editor-of-news-for-bloomberg.html

Executive Editor of News for Bloomberg Digital: We Need More Monetary Inflation to Fight Price Inflation

My head is still spinning.

Weisenthal is executive editor of news for Bloomberg Digital, co-anchor of “What’d You Miss?”, Bloomberg Television’s flagship markets program, as well as Bloomberg’s “Odd Lots” podcast.

Some of the things that Weisenthal’s perspective fails to consider:

That pumping more money into an economy means that more money is available to bid for goods, which is upward pressure on prices.

To pump more money into the investment sector results in a distortion of the economy. There will always be a natural tendency to move against the distortion. Thus requiring a continual accelerating amount of money in the investment sector which puts even more upward pressure on prices.

That if you simply stop the money printing, the price inflation will end on its own.

Capitalism is about free markets. It has nothing to do with central bank manipulation of interest rates, higher or lower.

RW

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EconomicPolicyJournal.com: Best Evidence Top Federal Reserve Officials Have No Clue

Posted by M. C. on January 6, 2021

This climb in asset prices will very likely find its way in 2021 to consumer prices and the spike in consumer prices will be well over 2%. In the EPJ Daily Alert, I am forecasting price inflation will easily hit 3% this year and then 5% and possibly 10% within 18 months.

The Fed has no clue.

https://www.economicpolicyjournal.com/2021/01/best-evidence-top-federal-reserve.html

Loretta J. Mester, President and Chief Executive Officer of the Federal Reserve Bank of Cleveland delivered a speech at the Allied Social Science Associations Annual Meeting (via videoconference). Here is her remarkable comment on price inflation in the talk:

I expect this post-vaccination phase of the recovery to continue over the next few years, with growth above trend, declines in the unemployment rate, and gradually rising inflation…Nor would the strengthening in growth I expect to see later this year necessitate a change in our policy stance because I expect that the economy will still be far from our employment and inflation goals…The economy’s intrinsic dynamics suggest that inflation is not going to move up quickly above 2 percent. 

At the same ASSA meeting,  Chicago Federal Reserve President Charles Evans said:

It likely will take years to get average inflation up to 2 percent, which means monetary policy will be accommodative for a long time…The bottom line is that it will take a long time for average inflation to reach 2 percent.

This is the type of thinking going on in the Federal Reserve System.

It is absolutely stunning. They are simply looking at price inflation over recent past years and are making projections based on the recent past that price inflation will not spike above 2%.

This despite the fact that in 2020, the Federal Reserve increased the money supply by $4 trillion (an increase of 25% plus) and that asset prices from housing to the stock market to Bitcoin are soaring because of the massive money pump.

This climb in asset prices will very likely find its way in 2021 to consumer prices and the spike in consumer prices will be well over 2%. In the EPJ Daily Alert, I am forecasting price inflation will easily hit 3% this year and then 5% and possibly 10% within 18 months.

The Fed has no clue. By the end of 2022, I am going to have to update my book, The Fed Flunks: My Speech at the New York Federal Reserve Bank, with a new chapter pointing out the above failure of Federal Reserve officials to recognize the irresponsible money printing that they are now conducting. –RW

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EconomicPolicyJournal.com: There is No Price Inflation (As Long as You Don’t Eat)

Posted by M. C. on September 12, 2020

https://www.economicpolicyjournal.com/2020/09/there-is-no-price-inflation-as-long-as.html

As can be seen in the chart above, the 12-month annualized price inflation rate dived after the COVID-19 lockdowns started and only started to climb after the May bottom.

Now, the annualized Consumer Price Index through the end of August stand at “only” 1.3%.

But breaking things down a bit, things look much different.

Food prices are soaring. Meats are up 7.1%, dairy and related products are up 5.7%, non-alcoholic beverages are up 5.1%, limited service meals and snacks are up 4.8%, tobacco and smoking products are 5.0% and medical care is up 5.3%.

What is driving the general index down is declines in goods we are not using anymore, or are using a lot less. Airline fares are down 23.2% and energy is down 9.0%

But the goods people are actually buying are way up.

It should be remembered that President Nixon in 1971 imposed wage and price controls when the CPI was only 4.0%. Most food prices are climbing at a faster rate than this now.

I fully expect the general CPI number to continue to climb as the prices that are declining start to bottom out and the climbing prices will have more of an impact on the overall CPI number.

Sometime next year, I expect price controls to become a very real possibility regardless of whether Trump or Biden is president.

RW

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EconomicPolicyJournal.com: Why Price Inflation Indexes Are More Fake Than Ever

Posted by M. C. on August 29, 2020

There are restaurants that don’t have outside dining just takeout. I pass them by.

The Jos. A. Bank clothing store in downtown San Francisco has closed. There is a sign in the window of the closed store suggesting I visit their nearest store—in Sacramento, a 2 hour drive.

It goes on and on. The unmeasured decline in goods and services that Cowen references because of the lockdowns is major and certainly not measured by the government indexes. Our standard of living is crashing.

https://www.economicpolicyjournal.com/2020/08/why-price-inflation-indexes-are-more.html

Tyler Cowen makes some interesting points in his Bloomberg column:

The most obvious effect of the pandemic is often better understood by the public than by professional economists: It has been an inflationary time, but not in the traditional manner.

The measured numbers indicate deflationary pressures, but that is misleading. In times of crisis, any measured inflation rate becomes much less meaningful as an economic indicator.

Let’s take education, which many American students have been doing online or not receiving much of at all. Whether for K-12 or at the university level, the cost of getting a quality education this year has risen drastically (think private tutors) — and for many individuals it may be impossible altogether. We are seeing deteriorating quality, and thus much higher real prices, yet this does not show up as either a quality adjustment or a price increase in standard calculations.
Or consider health care. For months, Americans were afraid to visit hospital facilities, for fear of contracting Covid-19. The perceived cost of the hospital visit was thus much higher, in terms of anxiety and medical risk, even if the sticker price or reimbursement rate for heart surgery hasn’t budged.
In many parts of the country, the lines at the motor vehicle offices are much longer, or it is much more time-consuming to get your car inspected for state approval. That is mostly due to pent-up demand from the worst months of the pandemic…
Education, health care and government are pretty big parts of our economy. If you add on the lower quality of restaurant visits, reduced sports performances (your ESPN cable package is worth less), and an inability to take preferred vacations and trips, you have many more negative quality adjustments that don’t show up in measured rates of inflation.
The Bureau of Labor Statistics, the Bureau of Economic Analysis, the Fed and other institutions have declined to make formal adjustments for these changes in the real standard of living…
Inflation measures work best when the consumption bundle is roughly stable over short periods of time, and that just hasn’t been the case this year…
Perhaps most important, price rules and other forms of inflation rules don’t really work in times of pandemic. The very measurement of price inflation becomes arbitrary, and dependent on inertial measurement conventions from normal times, so the numbers don’t have enough actual economic meaning to guide policy.

Cowen makes these points in a wider essay discussing Fed decisions based on traditional price index measures, which I am less inclined to agree with, but his point here on how the quality of goods and services have declined during the lockdown is a very important observation.

Off the top of my head, I can think of instances where it applies to me.

The local Whole Foods maintains a count of the number of customers in its store and makes others wait outside until customers leave to keep the occupancy limited. I really don’t have time for this nonsense (a cost for me) and so I rarely visit anymore.

There are restaurants that don’t have outside dining just takeout. I pass them by.

The Jos. A. Bank clothing store in downtown San Francisco has closed. There is a sign in the window of the closed store suggesting I visit their nearest store—in Sacramento, a 2 hour drive.

It goes on and on. The unmeasured decline in goods and services that Cowen references because of the lockdowns is major and certainly not measured by the government indexes. Our standard of living is crashing.

RW

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Indications Are That a Biden Administration Would Require the Fed to Adopt a Black Lives Matter Monetary Policy

Posted by M. C. on July 22, 2020

The reason black unemployment lags is because of high minimum wage laws, which no doubt would be boosted by a Biden administration. The only way the Fed could counter that is by creating higher price inflation. That is, there would be a new kind of inflation, blackflation, price inflation created by the Fed at higher rates to raise nominal low-skilled wage rates above the minimum wage rate.

How nutty can you get?

https://www.economicpolicyjournal.com/2020/07/indications-are-that-biden.html

From a Wall Street Journal editorial:

As old-fashioned as it sounds, we’re thumbing through Joe Biden’s economic plan on the theory that someone somewhere might want to know what’s in it. And what should we find, hiding like a presidential candidate in a Delaware basement, but a promise to politicize the Federal Reserve in a whole new way.

Mr. Biden wants to create a third mandate for the Fed. Recall that the current two are price stability and full employment. But, as the policy blueprint Team Biden cooked up with Bernie Sanders’s economic advisers argues, “the Black unemployment rate is persistently higher than the national average, which is why Democrats support making racial equity part of the mandate of the Federal Reserve.” The Fed chairman would be required to collect data and report on “the extent of racial employment and wage gaps” and what the Fed is doing about them.

The Journal notes:

Black employment tends to lag behind other ethnic groups, for complex reasons. This means the economy generally needs to run hotter for longer before lower-skilled black workers start to benefit from more employment and higher pay. That’s an argument for sound economic policies. But this proposal would bake in a bias in favor of ultraloose monetary policy, with racial justice furnishing a formal excuse to overlook inflation risks.

The reason black unemployment lags is because of high minimum wage laws, which no doubt would be boosted by a Biden administration. The only way the Fed could counter that is by creating higher price inflation. That is, there would be a new kind of inflation, blackflation, price inflation created by the Fed at higher rates to raise nominal low-skilled wage rates above the minimum wage rate.

How nutty can you get?

Well, as it turns out, even nuttier.

The Fed could make sure money is pumped into businesses that hire blacks, regardless of skills.

The Journal again:

The Biden monetary mandate also would open the door to regulatory mischief, which is the real prize for the progressive left. Under a diversity mandate, the Fed could require the banks it regulates to collect detailed data about the racial make-up of employees, and their pay, at companies applying for loans.

That data could then form a basis for enforcement action against banks that didn’t do enough to reduce racial pay gaps via their lending decisions, whatever “enough” means in the wilds of social-justice Twitter or a Treasury run by Elizabeth Warren. This would be a back-door way to impose through regulatory pressure various wage and diversity rules that otherwise couldn’t pass Congress or survive the Supreme Court. Such a data trove would provide bottomless fodder for grandstanding politicians on Capitol Hill…

 Under a race mandate, the Fed will have no choice but to obey whatever dictates Congress and a Biden Administration send its way in 2021.

There is a serious group of radical central planners surrounding Biden. A Fed Black Lives Matter monetary policy would be bad enough but it wouldn’t stop there.

RW

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Why Has There Been So Little Consumer Price Inflation? | Mises Wire

Posted by M. C. on May 13, 2020

But it is not true that price inflation is generally low. It simply happens outside of the official numbers, and most people feel it.

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Every once in a while economists want to go out on a limb with their models and publicly make forecasts on what the future rate of price inflation will be. The current COVID-19 lockdown is no exception. Many economists have warned us of potentially very high rates of price inflation, because monetary stimulus on a massive scale meets a negative supply shock. Others are afraid that the monetary and fiscal stimuli won’t be strong enough to compensate for the drop in private spending, resulting in a deflationary spiral. More often than not, both parties are wrong.

It seems important to ask what it is that they try to forecast and how closely connected it is to monetary policy interventions. When we look at the consumer price inflation rates in the eurozone, there really has not been much going on over the past decades, despite a rather activist monetary policy. Since 1999, the average annual inflation rate, measured by the Harmonised Index of Consumer Prices (HICP), has been about 1.65 percent. The rate for any one year never went above 3.2 percent—the value reached in 2008—and was negative only once, in 2015, at –0.6 percent. So, all in all that’s a fairly narrow band, and the average aligns rather nicely with the Eropean Central Bank’s (ECB) stated target, although some economists would like to see it even closer to 2 percent.

Figure 1: Year-on-Year Percentage Change from January of the Previous Year to January of the Respective Year

M2 and Real GDP Gap
Sources: ECB, IMF. The explanatory gap is defined as the growth rate of M1 minus the growth rates of the HICP and real GDP.

In contrast, the eurozone’s M1 monetary aggregate has grown at an average annual rate of 7.59 percent over the same period (1999–2020), which means that it has much more than quadrupled, whereas consumer prices have only grown by a bit more than 40 percent. One would not expect all of the monetary expansion to translate into proportional price inflation, but the observed gap is surprisingly large and persistent. Real economic growth according to official numbers hardly fills it. Real GDP has grown by merely 32 percent since 1999, or by an average annual rate of 1.35 percent. A back-of-the-envelope calculation by which we subtract both the average real growth rate and the average rate of consumer price inflation from the average growth rate of the money stock M1 leaves us with an explanatory gap of about 4.6 percent per year. Where does the money go if it is not absorbed by higher unit prices for consumer goods or a larger real output?

Well, there are essentially two possible explanations. First, there may have been increases in the reservation demand for money. Put differently, there may have been a substantial decrease in the velocity of money. Indeed, if one believes that the quantity equation—PY = MV, where P is the HICP, Y is real GDP, and M is the money stock M1—accurately relates the empirical magnitudes considered, then yes, velocity (V) must have taken up the slack. But since velocity here is merely residual, it explains the entire gap simply by definition, which is to say that it does not explain anything at all. There surely are changes in the reservation demand for money, but should they be so persistently positive every year? And why should they be so high (see Figure 1)?

The second possibility is that inflationary pressures actually materialize outside of consumer goods industries, most notably in the markets for long-term assets, such as stocks and real estate. This would imply that the HICP inflation measure grossly underestimates the general rate of price inflation. The surge of asset price inflation over the past decades has been widely documented, and this clearly matters to the average household. When asset prices rise it becomes harder to attain any given level of real wealth if you are not there already.

Figure 2: HICP Inflation Rates and the Median Inflation Perceptions in the Euro Area since 2004

Inflation Perceptions HICP
Source: Business and consumer survey database, European Commission.

The answer lies most likely in some combination of these two causes and some other factors. But the second cause—inflationary pressures outside of consumer goods industries—seems to be the more important one. It is especially important if we want to evaluate how well average citizens are actually doing. And it turns out that if we listen to what they have to say, we find a rather interesting empirical result.

Since 2004, the European Commission has published survey data on inflation perceptions. Figure 2 shows how those perceptions compare to the HICP inflation measure from 2004–19, the period for which data on inflation perceptions is available. The geometric average of the median perceived inflation rate over this time was 6.57 percent. Over the same period, the measured HICP inflation rate was 1.57 percent. So, on average, median perceived inflation has been 5 percentage points higher than the official rate of consumer price inflation. The average explanatory gap as defined above has been 4.8 percentage points, which is remarkably close to what the median respondent in the survey perceives to be the difference between actual and measured inflation (5 percentage points). The difference between perceptions and official numbers fills the gap quite nicely.

Now, it is very likely that perceptions are upward biased,1 but it is hard to believe that they completely miss the mark. The overall inflationary pressure does not seem to be covered by the official HICP numbers. In fact, the latter tend to be rigid relative to asset prices. This, among other things, has given monetary policymakers comfortable wiggle room for engaging in ever more expansionary measures without failing to remain below the 2 percent target. But it is not true that price inflation is generally low. It simply happens outside of the official numbers, and most people feel it.

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