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Price inflation in the United States remains stubbornly high, with October’s print at 7.7 percent. The Fed’s preferred measure, so-called core inflation is only two-tenths of a percent below 40-year highs, at 6.3 percent. Yet, it was just last year that the Federal reserve and other “experts” were concerned that inflation wasn’t high enough. In January 2021, for example, Jerome Powell stated that the Fed wanted price inflation to run above the “2-percent goal” because it had run below 2 percent for too long. The 2-percent inflation target, of course, is the arbitrary target picked by the Federal Reserve (and many other central banks) as the “correct” inflation rate.

Now with inflation running near 40-year highs, many are wondering what will be necessary to bring price inflation back down to the target level. More specifically, how many hikes in the target interest rate will be necessary, and how severe of a recession will be required? Wall Street is especially interested in the answer to this question because Wall Street is no longer about fundamentals. Rather, the “market” depends overwhelmingly on how much easy money the central bank pumps out. Naturally, the banker class wants a return to “normal”—i.e., quantitative easing and ultralow interest rates—as soon as possible. Moreover, Washington wants the same thing since the political class wants low interest rates to help ease the path to ever more government debt and higher deficits.

It’s not the least bit surprising that we’re already hearing calls for the Federal Reserve to abandon the 2-percent inflation target and instead embrace even higher perpetual inflation rates. For example, last week Bank of America economist Ethan Harris suggested that the 2-percent target CPI inflation rate be raised. We’ve seen similar urgings from both the Wall Street Journal and from think tank economists in recent months.

…click on the above link to read the rest…

Strait Outta Hormuz

July 19, 2019

Strait Outta Hormuz

The Strait of Hormuz these days seems to be what the streets of Compton used to be in the 90s. Yesterday, Iran’s Revolutionary Guard said it has seized a “foreign vessel” for smuggling fuel. And this morning, news came in that the US has shot down an Iranian drone in the Strait of Hormuz, after it allegedly threatened a US warship. About a fifth of global daily oil consumption (c. 21 million barrels) passes through the Strait each day. Moreover, tensions between the US and Iran are more likely to increase than not (don’t forget Iran also shot down a US drone last month). So don’t expect a smooth ride for oil prices this summer.

From the Strait of Hormuz, to back to Europe. According to Bloomberg sources, ECB staff is looking into potentially reforming its inflation target from “below, but close to 2%” to perhaps a policy band around 2%. Such a band would explicitly make the inflation target symmetric (something President Draghi favours), which means that the ECB can better signal willingness to overshoot the target for a short while. As such, it can reinforce inflation expectations if it is seen as a signal of more (or a prolonged period of) loose monetary policy. However, our ECB watcher Bas van Geffen cautions that the risk of such a symmetric band is that the market could also interpret the lower bound as ‘good enough’, especially if inflation keeps undershooting the ECB’s aim. Suppose the band is 0.5%. This implies the ECB might target an inflation rate of 2.5%, but it also implies that an inflation rate of 1.5% is within the ECB’s target band. Hooray, the ECB has achieved its inflation target by simply changing the definition of the target. What does that mean for its credibility? To avoid that situation, a symmetric band should probably be accompanied by more stimulus to rekindle inflation expectations.

…click on the above link to read the rest of the article…

Rethinking the Fed’s 2% Inflation Target: Spotlight On an Absurd Debate

September 25, 2018

Rethinking the Fed’s 2% Inflation Target: Spotlight On an Absurd Debate

Is the Fed’s 2% inflation target too high or too low? That’s the big debate now amongst central bankers.

The Wall Street Journal reports Policy Makers Rethink a 2% Inflation Target.

From Ottawa to Oslo, policy makers have been considering whether that level of consumer-price growth, a Holy Grail for the world’s major central banks over the past quarter-century, is still relevant.

The 2% target was always an arbitrary figure, some economists argue, and even if it was optimal two decades ago, that is no longer the case given deep changes that have since reshaped the global economy.

Trouble is, it isn’t clear what inflation rate would be better. Dozens of academic studies that considered that question have produced answers ranging from 6% to less than zero, according to a survey published last year by Federal Reserve economist Anthony M. Diercks.

“Whatever [inflation] rate was thought to be optimal in 2006 or before is now too low,” says Olivier Blanchard, a senior fellow at the Peterson Institute for International Economics in Washington, D.C., who has called for a 4% target.

Factors such as aging populations, low economic growth and higher savings rates are working to push down the neutral interest rate, at which the economy is growing at a sustainable rate for the long run and inflation is stable. As a result, central banks run a greater risk of taking benchmark interest rates to zero or below when seeking to support growth.

Demographics

Logic would dictate that if demographics work to hold the inflation target lower, then the target ought to be lower not higher.

Lesson from Japan, ECB

Japan provides ample evidence of what happens to savers when the central bank holds down rates hoping for higher inflation. All Japan did was accumulate debt. Inflation went nowhere.

…click on the above link to read the rest of the article…

Why Core Inflation is Rising & What it Means for Fed Rate Hikes

November 16, 2017

Why Core Inflation is Rising & What it Means for Fed Rate Hikes

Yellen was right to brush off “transitory” factors of “low” inflation.

Consumer prices, as measured by CPI for October, rose 2.0% year-over-year. A month ago, CPI increased 2.2%. The Fed’s inflation target is 2%, but it doesn’t use CPI, or even “Core CPI” – which excludes the volatile food and energy items. It uses “Core PCE,” which usually runs lower than CPI, and if there were an accepted measure that shows even less inflation, it would use that. But it does look at CPI, and there was nothing in today’s data to stop the Fed from raising its target rate in December.

The Core CPI rose 1.8%, up a tad from September’s 1.7% increase. Core CPI has been above 2% for all of 2016 and through March 2017. In the history of the data going back to the 1960s, Core CPI had never experienced “deflation.” But when Core CPI rates retreated in the spring through August, along with other inflation measures, a sort of panic broke out in the media:

But the retreat was repeatedly brushed off as “transitory” by Fed Chair Janet Yellen and other Fed governors, starting in June, when they vowed to continue raising rates “gradually” and proceed with the QE unwind. Yellen had specifically pointed at a few of those “transitory” factors. These factors are now turning around. Core prices have re-accelerated their increases.

One of the “transitory” factors Yellen had pointed out specifically was telephone services, which includes the monthly costs that consumers pay for their smartphones and landlines. Those costs had plunged as a price war among wireless carriers broke out in 2016. This summer, the CPI for wireless services plunged as much as 13% year-over-year. Consumers loved it, but it couldn’t last.

…click on the above link to read the rest of the article…

Yesterday’s “Watershed” Central Bank Announcement Which Everybody Missed

September 15, 2017

Yesterday’s “Watershed” Central Bank Announcement Which Everybody Missed

In what may have been a watershed moment in monetary policy – which awkwardly was missed by almost everyone as a result of the concurrent launch of the latest North Korean ballistic missile which immediately drowned out all other newsflow – late on Thursday, the Bank of Canada held a conference on inflation targeting and monetary policy titled “Bank of Canada Workshop “Monetary Policy Framework Issues: Toward the 2021 Inflation-Target Renewal” in which, in a stunning shift of monetary orthodoxy, BoC Senior Deputy Governor Carolyn A. Wilkins said that Canada was open to changes in the BoC mandate.

WILKINS: OPEN TO LOOKING AT `SENSIBLE’ ALTERNATIVES TO MANDATE

Or in other words, lowering or outright abolishing the central bank’s inflation target, or explicitly targeting financial conditions and asset prices.

While still early in the process, the BOC may be setting a precedent, one which other DM central banks may have no choice but to follow: If the Bank of Canada is going to look at alternatives to their mandate (with an emphasis on inflation), it – as several trading desks have suggested – could become the first central bank to officially change its mandate to reflect financial conditions that are too loose in the context of the current low r-star lowflation environment.

In practical terms, this would mean that instead of seeking chronically easier conditions to hit legacy inflation targets around ~2.0% while inflating ever greater asset bubbles, one or more central banks could simply say that 1.5% (or less) is sufficient for CPI and call it a day, in the process soaking up record easy financial conditions and bursting countless asset bubbles.

…click on the above link to read the rest of the article…

“Bad Options” Regarding 2% Inflation Targets (And Other Silly Notions)

September 14, 2017

“Bad Options” Regarding 2% Inflation Targets (And Other Silly Notions)

The Wall Street Journal and Bloomberg both posted ridiculous articles regarding today regarding inflation.

The former was on “bad options” the latter on “inflation expectations”.

Let’s take a look at both articles because both represent widely believed nonsense.

In Bad Options for Addressing Too-Low Inflation, Wall Street Journal writer Greg Ip says the Fed’s choice is to overheat the economy or give up its 2% target.

Unemployment and inflation are near their lowest levels in decades. Who wouldn’t love that?

Janet Yellen, for starters.

What looks like a dream economy could be a nightmare for the Federal Reserve chairwoman. Ms. Yellen’s worldview assumes that when unemployment is this low—4.4% in August—inflation should move up to the Fed’s target of 2%. Instead, it may have stabilized around 1.5%. That presents the Fed with some unpalatable options: deliberately overheat the economy for years to get inflation back up, then potentially induce a recession to stop it from overshooting; or give up on the 2% target, which could hobble its ability to combat future recessions.

This isn’t scaremongering: It’s the logical consequence of how central banks believe inflation operates. At the center of their model is the Phillips curve, according to which inflation edges lower when unemployment is above its natural, equilibrium level and putting downward pressure on prices and wages. Below that natural rate, also known as full employment, inflation crawls higher.

Until recently, Fed officials scoffed at the possibility [Trend inflation has fallen]. They noted surveys that suggest the public still expects inflation to return to 2% and credit their oft-repeated promise to hit their 2% target. But are they fooling themselves? Expectations of inflation are determined in great part by what inflation actually has been, and after every recession since 1982, core inflation has averaged less than in the previous business cycle: 4.1% in the 1980s, 2.1% in the 1990s, 1.9% in the 2000s, and 1.5% since 2009.

…click on the above link to read the rest of the article…

Is an Inflation Comeback in the Works?

February 23, 2017

Is an Inflation Comeback in the Works?

Exterminating Angel

LOVINGSTON, VIRGINIA – Amid all the sound and fury of the Trump news cycle, hardly anyone noticed. There is a specter haunting this economy. It is the specter of inflation…

See, if you want to whip inflation now, you don’t need to do any of the really difficult things, such as printing less money… or God forbid, return to honest, market-chosen money (shudder!). All you need is intelligent nutrition! Image credit: Marshall Astor

Bloomberg has the report:

The U.S. cost of living increased in January by the most since February 2013, led by higher costs for gasoline and other goods and services that indicate inflation is gathering momentum. The consumer-price index rose a larger-than-forecast 0.6% after a 0.3% gain in December, Labor Department figures showed Wednesday. Compared with the same month last year, costs paid by Americans for goods and services rose 2.5%, the most since March 2012.

French investment bank Natixis makes a related observation:

The return of inflation in the euro zone with the rise in the oil price will drive the European Central Bank to give up QE […] Our estimate is that an end to QE would raise interest rates by 110 basis points.

Wait – inflation is what the Fed has been looking for. And the latest numbers reveal it may have already reached the Fed’s target of 2%. If you’ll recall, the Fed set itself two targets: Unemployment would have to fall below 5%. And inflation would have to rise above 2%. Reaching those two targets would prove that the economy was healthy enough to allow the Fed to raise rates.

Higher rates of inflation – higher prices – signal more consumer demand. And more labor demand, too. It suggests there are more people with more money ready to spend it. How could that ever be a bad thing?

…click on the above link to read the rest of the article…

Yes, The ECB Chief Economist Really Said It: “If You Print Enough Money, You Always Get Inflation. Always.”

January 6, 2016

Yes, The ECB Chief Economist Really Said It: “If You Print Enough Money, You Always Get Inflation. Always.”

Once upon a time there was a cute, if amusing and terribly disingenuous debate among those who have never actually traded but pretend to know finance, about what QE and “unconventional policy” actually was. “It’s an asset swap” they said, “it’s not printing money” they said.

We are happy to close the chapter on all those sophist hacks once and for all, with a painfully obvious, if stunning in its honesty, declaration by none other than ECB Executive Board Member Peter Preat, who earlier today said the following: “If you print enough money, you always get inflation. Always.”

The full context from Reuters, which reports that “money-printing plan has so far failed to drive up inflation” and touches on Europe’s odd fascination with never having a backup plan: “the bank does not have an alternative “plan B”, ECB Executive Board member Peter Praet said in a magazine interview published on Wednesday.

More details:

“I accept that our policy has not yet been successful: inflation in Europe has for a long time been at a very low level of almost zero,” Praet, the ECB’s chief economist, told Belgian weekly magazine Knack.

Praet said various factors, notably low oil prices and less buoyant emerging economies, meant it was taking longer to reach the goal of inflation of close to but below 2 percent.

“We need to be attentive that this shifting horizon does not damage the credibility of the ECB,” he added.

Too late, friend.

Inflation has missed the ECB’s target of close to but below 2 percent for almost 3 years and it will still take years at best to drive up price growth towards the target, the bank forecast earlier.

Praet said that, despite this shifting horizon, the ECB did not have an alternative to its policy of low interest rates and 1.5 trillion euro asset buying scheme.

…click on the above link to read the rest of the article…

The Fed’s 2% Inflation Fairytale—–Who Made It Up And What Does It Mean?

November 5, 2015

The Fed’s 2% Inflation Fairytale—–Who Made It Up And What Does It Mean?

Once upon a time, not too long ago, central bank wizards began telling a fairytale that economies need inflation. But not just any inflation. In their Goldilocks make-believe world, the not too hot, not too cold, just right dose of two percent is needed to keep an economy healthy.

While there is absolutely no quantifiable data or economic model that proves or supports this oft-cited fairytale, the business media keep repeating it, selling the fiction that a two-percent inflation rate will somehow create jobs and spur economic growth.

“Worry Over Low Inflation Kept Fed at Bay,” screeched the Wall Street Journal, 9 October headline, following the release of Federal Reserve minutes in which they decided not to raise interest rates.

Who made this up? How is inflation – paying more for goods and services – the perfect financial tonic for working people to swallow?

In the United States, for example, with wages trending between decline and stagnation, more inflation means paying more to get less. With median household income below 1999 levels, how can higher inflation stimulate more spending? How can higher inflation be beneficial when, according to new Social Security data, 63 percent of Americans make less than $40,000 per year?

As dismal as those numbers are, in countries around the world where unemployment is much higher and real income and wages have fallen more dramatically, central bank charlatans persist with their “we need inflation” refrain.

A headline in the Financial Times read: “Eurozone’s small rise in prices misses ECB inflation target.” And the article reported: “Prices ticked up across the eurozone this month, although they remain well short of the European Central Bank’s 2 percent inflation target needed to bolster the region’s economic recovery(FT, 31 October 2015).”

…click on the above link to read the rest of the article…

Today’s CPI Lesson: The Fed’s 2% Inflation Target Is Completely Stupid

May 24, 2015

Today’s CPI Lesson: The Fed’s 2% Inflation Target Is Completely Stupid

The madness of the Fed’s pending 81 month run of zero interest rates comes down to an inflation subterfuge that has no logical or empirical grounding in real world economics. Essentially, the Keynesians who currently inhabit the Eccles Building have turned all of central banking’s anti-inflation history on its head, saying, instead, that there is not enough of it to create optimum economic growth and wealth; and, besides, the CPI is running below the 2% target—so prolonging the free money gravy train can’t do much harm.

Every part of that proposition is dead wrong. To wit, free money does immense harm by fueling rampant carry trade speculation; there is zero evidence that 2% inflation results in any more growth than 1% or even 0% inflation; and, as an empirical matter, there is plenty of inflation in the US economy and has been during the entire past 15 years of rampant money printing designed to stimulate more growth.

Still, real final sales in the US economy have grown at only a 1.8% rate since the year 2000, or by just half of the 3.5% rate recorded for the prior 46 years. But that downshift is not in any way attributable to inflation missing the allegedly optimum 2% target. In fact, during the last 15 years the CPI has increased at an average rate of exactly 2.18%.

So where’s the beef or rather the allegedly missing beef? Well, the monetary high priests hold that the PCE deflator, not the CPI, is the correct measure of inflation because it takes better account of changing consumer preferences or weighting shifts in the market basket of what people buy. That is, it captures their shifting to chicken, tuna or spam when they can’t afford steak.

…click on the above link to read the rest of the article…

Modern-Day Monetary Cranks and the Fed’s “Inflation” Target

April 18, 2015

Modern-Day Monetary Cranks and the Fed’s “Inflation” Target

One Bad Idea After Another

Ben Bernanke is frequently in the news these days. The latest occasion concerns his opinion on the Fed’s “inflation” target, i.e., the target for the speed at which money should be debased relative to consumer goods in order to finally attain centrally planned economic nirvana.

Price inflation is currently deemed to be “too low” by our bien pensants, in spite of the fact that the broad US money supply TMS-2 has more than doubled since 2008 (as of March, it is very close to $11 trillion, up from $5.3 trn. in early 2008). If recent CPI data are to be believed (which requires a bit of a leap of faith), consumers may actually get slightly more goods and services for their money henceforth. What an unimaginable horror!

CPI dips ever so slightly into negative territory year-on-year – the nightmare of central planners around the world – click to enlarge.

Bloomberg reports that Ben Bernanke has an idea how to combat this terrifying development. Obviously, with the CPI’s rate of change dipping a few basis points into negative territory, the end of the world is practically at hand, so something needs to be done pronto.

Bernanke delivered his remarks at a conference sponsored by another economic central planning institution, the IMF. The people running this surplus to requirement bureaucratic vampire den are dreaming of the day when the IMF will become the global central bank, in line with Keynes’ “Bancor” idea. This would allow fiat money inflation on a nigh unprecedented scale, as currencies would no longer compete and be comparable. However, we digress.

…click on the above link to read the rest of the article…

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