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Posts Tagged ‘price inflation’

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.

https://mises.org/wire/why-has-there-been-so-little-consumer-price-inflation?utm_source=Mises+Institute+Subscriptions&utm_campaign=bf2c8fe661-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-bf2c8fe661-228343965

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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bionic mosquito: Economic Dr. Mengele

Posted by M. C. on April 14, 2020

What of the damage done here? Out of these countless millions of unemployed, how many will ever find similar employment in the future? After a few years out of the labor market, who will want to hire them? Many of these are young people: in restaurants, hotels, retail, etc. This purposefully-driven economic destruction will cost them for the rest of their lives.

I wonder how Amanda feels reading her dad’s missives? “Amanda, your situation is worth it, for the greater good.” That sounds lovely. We can certainly feel sorry for, and pray for, Amanda. God save her any further pain resulting from her father’s advice.

https://bionicmosquito.blogspot.com/2020/04/economic-dr-mengele.html

The stupidity, callousness, and corruption just doesn’t quit. This is a follow-up to an earlier John Mauldin column, where I asked the question Who Will Count the Cost? Mauldin has continued to write about how wonderful it is that the economy is being destroyed in order to fight the corona; his latest: Bending the Inflation Curve.

I will get a couple of simple points out of the way – points where Mauldin is wrong, but not points worth spending further time on: Mauldin confuses deflation with depression; Mauldin confuses consumer price and asset price increases with inflation.

Further, I won’t spend any time on the countless trillions being spent by the Federal government, or created from the Fed (to include the leverage on top of that). I can’t keep up with the numbers. Mauldin calls it $8 trillion thus far, and counting. Good enough for me.

So, why do I read Mauldin? I find him to be a good gauge for what those who make meaningful financial and economic decisions are up to. Nothing more.

Before starting with Mauldin, it is worth taking a look at an analysis done at The Market Ticker: Stop IT NOW Fraudsters. (it is from this post where I got the idea for the title of my post.)

It is not a long read; I will summarize: every projection model of this corona was wrong, wrong to the high side, and wrong by a factor ranging from two to twenty-five times. Not 25%…twenty-five times. And these errors were as compared to the lower boundary of the projections – not the mid-point, not the high end.

And before you say “thank God they put the house-arrest measures in place, see how well these worked!”, it is noted – by those who ran the models: COVID-19 projections assuming full social distancing through May 2020.

And this says nothing of the gross manipulation of the “data” (and I use that term in the loosest sense imaginable) of the number of people diagnosed with and claimed to have died due to the corona).

Now, on to Mauldin:

But thankfully, we are starting to see the curves bend. (emphasis in original)

Well, we are certainly seeing them bend in the national deficit, the unemployment numbers, the Fed’s balance sheet. These are certainly bending. Mauldin recognizes this.

Nevertheless, much of the economic damage is already done.

Well, you can’t cry over spilt milk. Nevertheless, no, much of the economic damage is not already done.

Close to 17 million people have filed for unemployment in the last 3 weeks.

Mauldin sees that the number will grow much higher:

That potential 20–25% of unemployed also represents significant numbers of children and family members who are also without money.

What of the damage done here? Out of these countless millions of unemployed, how many will ever find similar employment in the future? After a few years out of the labor market, who will want to hire them? Many of these are young people: in restaurants, hotels, retail, etc. This purposefully-driven economic destruction will cost them for the rest of their lives.

Mauldin, without a blink, cites Fed Chairman Powell, who says “Our ability is limited by the law.” Don’t you take great comfort in that? Well, wait…what limits the law?

The Fed needs the Treasury Secretary’s permission to do this. That means Trump must approve this….

Not that I would feel any better if it had to get through Congress. In any case, one wonders why Mauldin even bothered saying anything about “the law,” when he further writes:

This program did not appear overnight. It took days, if not weeks, to figure out how to contort the laws in order to do this.

What is the point of law if there is no point to law?

Lacy Hunt told me in an email and then telephone call that this last $2.2 trillion is not money printing. They are simply buying already existing bonds, not unlike QE in the past when the Federal Reserve bought US government bonds.

I guess Lacy Hunt belongs in the same turnip truck with Mauldin. “Well, buying US government bonds is money printing, but buying other bonds is not money printing.” And it is irrelevant whether the Fed buys existing bonds or bonds purchased directly from the issuer. It is truly irrelevant.

This is not like Venezuela, Argentina, or Zimbabwe. Not even close.

This is the truest thing Mauldin has ever written. He is right: it isn’t close. None of these countries ever had the ability to come up with $8 trillion in a matter of a couple of weeks.

Now, why does Mauldin believe inflation (price inflation) is not on the horizon? Well, this is the good news: because we will soon have 20% or greater unemployment, demand has fallen through the floor! This is brilliant.

We (meaning those like Mauldin and his buddies) will get to see our asset prices increase without having to suffer through a higher cost for gasoline because no one else is working and won’t be driving anywhere. And this is precisely the deal they wanted: create a fake crisis (the corona) as a pretext to keep the game going longer. If is costs us throwing a few bones ($1200) to the masses, so be it.

Conclusion

Speaking of unemployment, you will recall the tragedy of Mauldin’s daughter – lost both jobs just after her husband went to return to school; thereafter she had a stroke. Well, we get an update:

My daughter Amanda (who is recovering well from her stroke, thank you!) had a $71,000 hospital bill. I did not realize they did not have insurance when her husband left to go to pilot school. The hospital “renegotiated” the bill down to $56,000, and wants them to make $5,000-a-month payments. They are both now unemployed with two children.

I wonder how Amanda feels reading her dad’s missives? “Amanda, your situation is worth it, for the greater good.” That sounds lovely. We can certainly feel sorry for, and pray for, Amanda. God save her any further pain resulting from her father’s advice.

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