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Inflation Targeting Madness: Russia Raises Rates Again

December 19, 2018

Inflation Targeting Madness: Russia Raises Rates Again

I continue to wonder who Bank of Russia President Elvira Nabuillina works for.  Seriously.  On Friday, in response to solid growth in Russian economic statistics over the past few months, Nabuillina again raised interest rates 0.25%.

She still adheres to idiotic IMF-style ‘inflation targeting’ dogma.

Price inflation in Russia finally got off the roughly 2.5% mat in August steadily rising to 3.8% in November.  This prompted Nabuillina to raise rates again, stifling growth which itself was stifled by her overly-cautious rate cutting earlier in the cycle.

The recovery in Russia after the Ruble crisis of 2014/15 was exasperated by her holding interest rates too high for too long.  The Russian bond market took way to long to normalize because of this lack of liquidity.

In 2017 and early 2018, every time the Bank of Russia cut rates the Ruble would strengthen, that’s how high demand was for them.  The Russian yield curve was approaching normalcy.

And Nabuillina is now, again, undermining it by trying to control price inflation as opposed to letting the market regulate itself.

The short-term Russian bond market is screaming for some relief and the Bank of Russia won’t accomodate.  Remember, inflation in Russia is running just 3.8%, so we’re talking a positive real yield on overnight money of 4%.  This is not making it easy to liquefy a growing economy.  Real yields of 4% on 3 to 5 year money?  Ok.

But overnight?   I’m all for a cautious central bank that does not inflate massive bubbles but I’m also not for a central bank to do the bidding of a country’s adversaries either by undermining growth with needless austerity.

Central Bank Fallacies

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The Fed’s “Inflation Target” is Impoverishing American Workers

June 21, 2018

The Fed’s “Inflation Target” is Impoverishing American Workers

Redefined Terms and Absurd Targets

At one time, the Federal Reserve’s sole mandate was to maintain stable prices and to “fight inflation.”  To the Fed, the financial press, and most everyone else “inflation” means rising prices instead of its original and true definition as an increase in the money supply.  Rising prices are a consequence – a very painful consequence – of money printing.

Fed Chair Jerome Powell apparently does not see the pernicious effects of inflation (at least he seems to be looking around… [PT]) Photo credit: Andrew Harrer / Bloomberg

Naturally, the Fed and all other central bankers prefer the definition of inflation as a rise in prices which insidiously hides the fact that they, being the issuers of currency, are the real culprit for increased prices.

Be that as it may, the common understanding of inflation as rising prices has always been seen as pernicious and destructive to an economy and living standards.  In the perverted world of modern economics, however, the idea of inflation as an intrinsic evil has been turned on its head and monetary authorities the world over now have “inflation targets” which they hope to attain.

America’s central bank is right in line with this lunacy. According to the Fed’s “May minutes”, it wants

Translated into understandable verbiage, the Fed wants everyone to pay at least 2% higher prices p.a. for the goods they buy.

Yes, by some crazed thinking US monetary officials believe that consumers paying higher prices is somehow good for economic activity and standards of living!  Of course, anyone with a modicum of sense can see that this is absurd and that those who espouse such policy should be laughed at and summarily locked up in an asylum!  Yet, this is now standard policy, not just with the Fed, but with the ECU and other central banks.

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How the Fed’s Inflation Policies Crucify Workers in Pictures

February 19, 2018

Every month, pundits comment on average wages. But median wages best explain how the Fed’s policies crucify workers.

The meme of the day is wage growth is accelerating.

I disputed that notion on February 7, in Acceleration in Wage Growth is a Statistical Mirage.

That penny more a year is by hour, in “real” inflation-adjusted terms. The calculation is from the BLS.

Nonetheless, the Fed is not happy with wage destruction.Various Fed presidents seek still higher inflation.

Inflation Targeting

Instead of using an inflation target of 2%, San Francisco Fed President John Williams proposes the Fed use a price-level target, that would allow inflation to run higher during expansions to make up for prior shortfalls.

We need that discussion, but in the opposite sense because the Fed’s insistence inflation in a disinflationary world has seriously harmed median and average wage earners.

Occupational Employment Statistics (OES) from the BLS supports this view.

The following charts are from OES data downloads at the state and national level coupled with additional CPI data from the BLS.

Data for these charts are from May 2005 through May 2016. Those are not arbitrary dates.

The latest OES data is from May of 2016 and prior to May of 2005, the OES used varying months. Having all yearly data from May allows easy comparison of wages vs. year-over-year CPI measurements.

National Hourly Wages

Wage Differentials Mean vs. Median Hourly Wages by State

Every month, analysts track the monthly jobs report for “average” wage increases. Such analysis is misleading because most of the benefits go to the top tier groups.

This behavior is not unexpected, but it makes it very difficult for the bottom half of wage earners who do not own a house, to buy a house.

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Mark Carney Forced To Explain Surge In UK Inflation To Highest In Almost 6 Years

December 12, 2017

Mark Carney Forced To Explain Surge In UK Inflation To Highest In Almost 6 Years

The market expected Mark Carney to avoid it but it was just not meant to be.

The BoE Governor will suffer the ignominy of a bizarre tradition of having to write a letter to the Chancellor of the Exchequer explaining why UK inflation is more than 1.0% above the target of 2.0%. The market had expected the UK CPI to rise by a modest 0.2% month-on-month, taking the year-on-year rate up to 3.0%. Instead the month-on-month rate hit 0.3% pushing the annual rate to 3.1%, its highest rate since March 2012.

As Bloomberg writes, “U.K. inflation unexpectedly accelerated to the fastest in more than 5 1/2 years in November, forcing Bank of England Governor Mark Carney to explain why price growth is so far above target. Consumer prices rose 3.1 percent from a year earlier, driven by the cost of air fares and computer games, the Office for National Statistics said on Tuesday. That’s up from 3 percent in October and the highest since March 2012.”

The latest reading means Carney is now compelled to write to Chancellor of the Exchequer Philip Hammond explaining why inflation is more than 1 percentage point away from the official 2 percent target. The letter will be published alongside the BOE’s policy decision in February, rather than this week, as the Monetary Policy Committee has already started its meetings for its Dec. 14 announcement.

Rising costs of airfares along with petrol and energy prices were expected to have been offset by an easing in food and clothing price pressures, the latter helped by seasonal promotions. However, the price of computer games rose more than expected and higher chocolate prices saw food and non-alcoholic drink prices rise 4.1% versus November 2016, the highest level since 2013.

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

Austrian Monetary Theory vs. Federal Reserve Inflation Targeting

August 31, 2017

AUSTRIAN MONETARY THEORY VS. FEDERAL RESERVE INFLATION TARGETING

One of the leading policy guideposts for central banks and many monetary policy proponents nowadays is the idea of “inflation targeting.” Several major central banks around the world, including the Federal Reserve in the United States, have set a goal of two percent price inflation. The problem is, what central bankers are targeting is a phantom that does not exist.

Perhaps we can best approach an understanding of this through an appreciation of some of the writings by members of the Austrian School of Economics on matters of monetary theory and policy. Carl Menger (1840-1921), the founder of the Austrian School in the 1870s, had explained in his Principles of Economics (1871) and his monograph on “Money” (1892), that money is not a creation of the State.

Money Emerges from Markets, Not the State

A widely used and generally accepted medium of exchange emerged “spontaneously” – that is, without intentional government plan or design – out of the interactions of multitudes of people over a long period of time, as they attempted to successfully consummate potentially mutually advantageous exchanges. For example, Sam has product “A” and Bob has product “B”. Sam would be happy to trade some amount of his product “A” for some quantity of Bob’s product “B”. But Bob, on the other hand, does not want any of Sam’s “A”, due to either having no use for it or already having enough of “A” for his own purposes.

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The Wrong War For Central Banking

October 28, 2015

The Wrong War For Central Banking

Fixated on inflation targeting in a world without inflation, central banks have lost their way. With benchmark interest rates stuck at the dreaded zero bound, monetary policy has been transformed from an agent of price stability into an engine of financial instability. A new approach is desperately needed.

The US Federal Reserve exemplifies this policy dilemma. After the Federal Open Market Committee decided in September to defer yet again the start of its long-awaited normalization of monetary policy, its inflation doves are openly campaigning for another delay.

For the inflation-targeting purists, the argument seems impeccable. The headline consumer-price index (CPI) is near zero, and “core” or underlying inflation – the Fed’s favorite indicator – remains significantly below the seemingly sacrosanct 2% target. With a long-anemic recovery looking shaky again, the doves contend that there is no reason to rush ahead with interest-rate hikes.

Of course, there is more to it than that. Because monetary policy operates with lags, central banks must avoid fixating on the here and now, and instead use imperfect forecasts to anticipate the future effects of their decisions. In the Fed’s case, the presumption that the US will soon approach full employment has caused the so-called dual mandate to collapse into one target: getting inflation back to 2%.

Here, the Fed is making a fatal mistake, as it relies heavily on a timeworn inflation-forecasting methodology that filters out the “special factors” driving the often volatile prices of goods like food and energy. The logic is that the price fluctuations will eventually subside, and headline price indicators will converge on the core rate of inflation.

This approach failed spectacularly when it was adopted in the 1970s, causing the Fed to underestimate virulent inflation. And it is failing today, leading the Fed consistently to overestimate underlying inflation. Indeed, with oil prices having plunged by 50% over the past year, the Fed stubbornly maintains that faster price growth – and the precious inflation rate of 2% – is just around the corner.
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