Inflation ex-inflation to be Official Fed Policy?
Well, it seems to be just about official: Inflation ex-inflation has formally become the policy of the Federal Reserve.
At least, according to voting Fed Governor Frederic Mishkin, who tells Bloomberg that Inflation Minus Food, Energy Is a `Better Guide'.
When reading his statements, I am reminded of the former Fed Chair Arthur Burns, who in the 1970s similarly did not want to include energy and food prices in his inflation measures. That "experiment" ended rather disastrously, with flat growth, and very high inflation, a condition that came to be known as stagflation.
Growth isn't as weak today, and inflation isn't as pernicious. But we do have strong commodity price increases, with GDP growth significantly slowing in the US. Add a weak US dollar versus a basket of global currencies (see America vetoes G7's dollar alert). Then bring 2 billion new consumers into the global economy from India and China. (see Ship Shortage Pushes Up Prices Of Raw Materials), Next, add a hot war in the Middle East. Last, a Treasury Department hellbent on increasing the money supply. That's the formula for what I call "demi-stagflation," and what my colleague Jeff Saut at Raymond James calls "Agflation."
All I ask is for the entities that measure the goods and services that make up our economy, and the bureaucracies that set government policy to accurately portray them, and stop the absurd emphasis on the non-inflationary items.
Here's the ubiq-cerpt:™
"Federal Reserve Governor Frederic Mishkin said inflation measures that exclude food and energy costs are a "better guide'' to underlying changes in prices.
Changes in price indexes without food and energy "provide a clearer picture of underlying inflation pressures,'' Mishkin said in the text of remarks to the HEC Montreal Macroeconomics and Monetary Policy Conference today. ``If the monetary authorities react to headline inflation numbers, they run the risk of responding to merely temporary fluctuations.''
Mishkin argued that both so-called core and headline measures of inflation are useful to policy makers and the central bank shouldn't rely on any one gauge. Sustained increases in energy costs can push up expectations for inflation, he said, noting that recent gains in oil are a "reminder that shocks can persist longer than one might have first expected.''
Does a 5 year run in energy prices and other commodities count as sustained?
The emphasis on Inflation ex-inflation continues . . .
>
Source:
Mishkin Says Inflation Minus Food, Energy Is a `Better Guide'
Craig Torres and Greg Quinn
Bloomberg, Oct. 20 2007
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aohaOKFSvu.I
America vetoes G7's dollar alert
Edmund Conway
Telegraph 1:19am BST 22/10/2007
http://tinyurl.com/33k3so
Ship Shortage Pushes Up Prices Of Raw Materials
ROBERT GUY MATTHEWS
October 22, 2007; Page A1
http://online.wsj.com/article/SB119301028152866449.html
Monday, October 22, 2007 | 09:00 AM | Permalink
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If you want to keep your job, do as your boss tells you.
Posted by: Old Ari | Oct 22, 2007 9:10:36 AM
"...recent gains in oil are a "reminder that shocks can persist longer than one might have first expected.''"
Somewhere in the land of the Federal Reserve there is a magic oil well that promises unlimited oil til the end of time. There is also a magic copper mine, magic farm field, and magic consumer that is neer exhausted.
That's the only conclusion I can come to.
Posted by: Neal | Oct 22, 2007 9:12:29 AM
You know, there's a reason why people like me don't take these guys seriously and believe that they have NO idea what they're doing, that the entire economic engine is broken, and that is hurting an awful lot of people.
Posted by: Karmakin | Oct 22, 2007 9:50:55 AM
Precisely why should my tax dollars pay the salary of some shmuck who refuses to pay attention to the realities of life in this country? Congress should fire the Fed employees. Paulson, Mishkin, the lot of 'em. Bush can appoint another sycophantic group all he wants, but this has to stop.
At what point is it remotely justifiable for the secretary of the treasury to be running around asking other countries to buy something he refuses to describe?
http://financialpetition.org
Posted by: Unsympathetic | Oct 22, 2007 10:08:45 AM
I am reminded of the newspaper headline in the Bugs Bunny cartoon: "Meat Prices Soar, Consumers Also Sore".
I can understand discounting monthly price fluctuations. A secular trend is something entirely different.
Posted by: The Dirty Mac | Oct 22, 2007 10:10:12 AM
Just a quibble, but actually there was no flat growth in the seventies in the U.S.A. Growth in the seventies was higher than in the 80ties and 00ties and about the same as in the 90ties.
Posted by: IM | Oct 22, 2007 10:27:03 AM
Reminds me of the go-go internet company I worked for in the 90's: the company never made any money but the stock kept rising (at one point it had a 30 bil market cap!) because of a fictitious measurement called "EBITDA" earnings. Naturally the company ended up bankrupt.
Posted by: lee | Oct 22, 2007 10:28:01 AM
As every statistician knows, the way to construct an average from a set of factors that have different variabilities is not to throw out the most variable ones but to weight them less than the other ones. Here you'd weight food and energy less than their "market basket" fraction might indicate. If food and energy are 40% more volatile than everything else, they would get a weight of 1/1.4^2 = 1/2 (roughly) of what their market basket share would indicate.
This is pretty elementary statistics, and the fact that the Fed and BLS aren't doing it for these metrics is, uh, not so good.
~~~
BR: FYI: Housing is 38% of the core inflation rate . . .
Posted by: John | Oct 22, 2007 10:37:26 AM
Fed to the American people: you know that life you live every day? It doesn't really matter compared to bonus season on Wall Street.
Posted by: F. Frederson | Oct 22, 2007 10:37:28 AM
Except what can the Fed do about energy prices? Its a supply shock combined with overall demand increase. All the Fed could try to do is lower demand through raising interest rates and send the economy into a recession. I'd prefer higher energy prices over that.
Posted by: Rob | Oct 22, 2007 10:39:47 AM
exactly. i think you have to throw out lots of past comps as indicators. we've never had a Fed like the last 10 years, where EVERY action is dictated by the fortunes of Wall St. folks in the market prior to 1997 NEVER talked about Greenspan Puts, or Bernanke Puts. w the exception of Arthur Burns cravenly stimulating the economy on behalf of Nixon, most FRB governors historically believed in letting the market sort itself out while they paid first attention to the overall economy. this FRB will sacrifice its credibility re the US $ and generally understood definitions of inflation on the altar of mark-to-mythology.
Posted by: scorpio | Oct 22, 2007 10:43:53 AM
So why not just use a 6 or 12 month moving average for food/energy inflation to smooth out temporary fluctuations?
What am I missing here?
Posted by: msn | Oct 22, 2007 11:04:15 AM
What I don't understand is why Barry, who is clearly a very smart man, continues to talk about this issue without acknowledging the policy trade-off.
Is the inflation ex-inflation crowd arguing for a tighter monetary policy? If you want to focus on headline inflation in the Taylor Rule then you have to be arguing for an increase in the funds rate.
The current rate only follows if you believe that core inflation is the figure to focus on right now. Does anyone honestly believe that we need rising interest rates at this moment?
Indeed, the FED would have to be playing it a little fast and loose to offer further cuts even with the core at current level. Unemployment has not edged past full employment and even the core is riding slightly above the comfort zone.
~~~
BR: I understand the trade off -- but I don't think the Fed can have a serious debate about the trade-offs until they are more honest about the inflation risks.
IMO, that dishonesty about inflation risks is what led to rates being taken down to ultra-low levels, and kept there too long. Had they acknowledged those risks and acted differently, we might not be looking at $90 Oil.
Posted by: karl smith | Oct 22, 2007 11:11:12 AM
Changes in price indexes without food and energy "provide a clearer picture of underlying inflation pressures,'' Mishkin said in the text of remarks to the HEC Montreal Macroeconomics and Monetary Policy Conference today. ``If the monetary authorities react to headline inflation numbers, they run the risk of responding to merely temporary fluctuations.''
Mr. Mishkin, quit the double talk. How come a large swing (down only) in something as "temporary" and "transient" as financial markets prompts you to take action immediately. OTOH, a multi-year rally in commodities might be transient and therefore to be ignored. How come commodity rally is noise. While a big down in stock market is a reliable signal (that economy is going down) to cut. of course the market came back fast. So what is signal and what is noise?
Posted by: zao | Oct 22, 2007 11:20:31 AM
Since demand for dollars is so high given the increasing demand for commodities across the globe, how does that figure when compared to the 1970's and moentary base expansion. It would seem that to some extent, the US is actually required to increase the dollars in circulation just to keep up with the increasing number of consumers...similar to your thesis on the BLS death/birth model. Any ideas?
Posted by: Darin | Oct 22, 2007 11:26:59 AM
Everyone knows that moving averages would eliminate the noise that they claim to be concerned about. There has to be another reason for leaving it out, and I'd sure like to know...cause right now I am thinking it's to water down the inflation numbers. Why would they wish to water down the inflation numbers? That's where it gets really interesting.
Any way you slice it, excluding F&E at this stage in the game is dishonest. Nothing volatile about an exponential curve folks.
Posted by: KP | Oct 22, 2007 11:52:15 AM
I think I may have just answered my own question...
http://tinyurl.com/2ahcsc
Posted by: KP | Oct 22, 2007 11:55:52 AM
karl,
your question is a relevant one. However, even the Taylor rule does not advocate rate hikes. The CPI inflation is 2.8%. Growth is 1-2%. Let us say 1.5%. Taylor rule would say 2.8%+1.5%=4.3%. Even 2% real growth equals 4.8%. Assumption is that the economy is operating a little below capacity and inflation a little above, a wash.
The more important question is whether they should cut a lot, just like they did in 2001-2003. The Taylor rule says no.
Posted by: zao | Oct 22, 2007 12:07:24 PM
Hi Barry, The Fed will do what is best for the Fed!
Posted by: David Price | Oct 22, 2007 12:13:43 PM
Just went to Outback this past Sunday evening. Two things to note:
1. It was packed on a Sunday. People clearly still have plenty of money to spend.
2. Dinner for two was almost $50. A couple of years ago that same dinner cost less than $40.
Posted by: Eddie | Oct 22, 2007 12:31:55 PM
I think if you look at the unemployment numbers you'll find a lot of the same thing going on. They are counting the unemployed, subtracting the unemployed.
Why does it seem that the main purpose of government economists is to mask how sick our economy really is?
Posted by: Remus Shepherd | Oct 22, 2007 12:32:46 PM
Check out my recent post on World Beta - examines gold prices moved 14 months forward to CPI. Looks like CPI going much higher. . .
http://worldbeta.blogspot.com/
Posted by: WorldBeta | Oct 22, 2007 12:38:26 PM
I have a question.
Debt in and of itself is not a bad or evil thing - some degree of debt is indeed beneficial for large scale projects (housing and cars on a peronal level; infrastructure and promoting technological advances on a national level). However, there reaches a point where debt becomes self-defeating, and that is when current revenues can only provide for current interest due.
I believe it is a given that everyone would agree that a reasonable definition of debt would be "a claim against future productivity". It would seem to me that at the point where debt claims equate to all future productivity gains, growth cannot be sustained. At that point, the only growth that can occur is by an increase in debt, which is then dependent upon rising assets to roll over this debt - classic Ponzi financing, which would lead to bubbles and what Mises called "crack up booms".
It seems to me that deflation is not only survivable but may well lead to a more prosperous end - deflation contains a natural cap on its depth, as money will never reach infinite value; however, inflation has no such cap, and currency can reach zero worth.
So my question is this: If inflation is a silent tax that cuts deepest into the middle and lower classes, yet deflation lowers the cost of debt, ecourages savings, and increases in the long term the standard of living for these same middle and lower classes, which is the greater enemy? And why, then, is deflation so feared by those in powerful positions?
Posted by: Winston Munn | Oct 22, 2007 12:39:09 PM
at what point do higher energy prices become 'self-limiting'?
The reason these items are usually excluded is because they are considered to be:
1. Transitory, or temporary and not lasting
2. Self limiting
It's clear that both #'s 1 & 2 have not been applying for the past 3 years!
So, the debate that excluding these items gives a better idea of inflation seems 'out of date' to me. If we do exclude them, we are not getting the real picture and as Fed President Richard Fisher states:
"Both food and energy have had a steep upward tilt for the last three years in a row. Under those circumstances, I’m personally reluctant to put complete faith in the core measures because they may be removing more signal than noise."
Posted by: UrbanDigs | Oct 22, 2007 12:52:12 PM
Anyone care to guess how many times Starbucks will increase prices in calendar 2008? Only once? (this, after two price hikes in 2007)
Or are volatile milk prices sure to come down?
Posted by: MrBernenke_TearDownThisCPI | Oct 22, 2007 1:05:57 PM
