Monday, June 28, 2010

Inflation is still within the Fed's target range

This index of inflation, the Personal Consumption Deflator, is arguably the best index of inflation from the individual's point of view. It also happens to be the Fed's preferred measure of inflation. Fed governors must be feeling pretty good that despite all the gyrations of the economy and Fed policy over recent years, both versions of this index (headline and ex-food and energy) are within the Fed's target zone of 1-2%.

I must admit that for about the past year I have been expecting inflation to move higher, and so far I have been dead wrong on this. I keep thinking that the Fed's huge addition of reserves to the banking system, coupled with the general weakness of the dollar, the strength in gold prices, the strength in commodity prices, and the steepness of the yield curve, all point to rising inflation, and it is just a matter of time before this occurs. But so far, those who believe that inflation is impossible when the economy is operating well below its full employment level have been right.

This is the kind of error I don't feel too bad about making, since higher inflation tends to have a very corrosive impact on the economy.


Benjamin Cole said...

"I must admit that for about the past year I have been expecting inflation to move higher, and so far I have been dead wrong on this."

Perhaps you have been listening to false signals--commodities and gold, which respond to global demand way more than Fed policy.

Anyway, MZM is down from last year.

Qualitative easing makes sense right now.

Inflation and OJ Simpson have one thing in common: You won't be seeing either one for a while.

McKibbinUSA said...

Inflation is still tame to date -- agreed. However, how is California going to manage if a budget compromise is not reached? I read that Gov Schwarzenegger is trying to pressure Sacramento by proposing that all state workers be held to minimum wage earnings until a budget plan emerges. Will Californians eventually agree to the austerity measures that will be required in order to live within a balanced budget, or will the US be approached for a bailout instead? I view California as a case study regarding how the nation might move forward with its own budget problems, thanks...

septizoniom said...

perhaps the inflation you search for is in asset prices, exactly as the fed wants; indulge high unemployment through "tight money" at the general public level, but float asset prices through extensive liquidity/credit to the banks.

John said...

Well, our 'Nobel Prize' winning economist Dr. Paul Krugman is apparantly feeling he isn't getting enough attention in the gloom sweepstakes so he has come out with his latest entry:

"We are in the early stages of a THIRD DEPRESSION" (emphasis mine)

Writing in that bastion of economic journalism, the New York Times, Professor K is lamenting the austerity of the European governments as harbingers of doom.

Those interested may find the article at

Maybe 'third depression' will be the apocolypse of the month' story for July.

Can't wait to see what it turns out to be.

Bill said...

If Krugman wasn't so influential, I'd actually feel sorry for him. I don't think I've ever seen him smile (except for when he won the Nobel, but it was more of a smirk). He just seems to be always pissed about something.

Scott Grannis said...

Bill: feel sorry for Krugman. I had dinner with him once many years ago. During the course of the conversation, I remember him saying he was very proud of the fact that he could write a column faster than anyone. Speed does not always lead to sound thinking or accuracy.

It is too bad that he still has a lot of influence, but he is losing it by the day.

Rob said...

Scott, no sign of that bull market you were expecting in the wake of the Chinese currency revaluation.

Frozen in the North said...

No one living today, well almost no one, has lived through deflation. Has anyone noticed the amount of cash going into bond recently. PIMCO which was telling everyone about the risk of inflation, is now a very long buyers of 5y and 0y T-bills. That is a real statement about inflation expectations in the U.S. Massive excess capacity (around 7% at last count), too many malls, and houses. This doesn't bode well for inflation.

The reality of GDP growth in the US is inventory rebuilding, once that's done, consumption is rising, but from very low levels.

I agree that inflation is a scourge on the economy, but so is deflation.

anyway, inflation is nowhere in sight today, core inflation is low and falling.

What does this say about GDP growth for the the second half of 2010, and for corporate earnings that are based on 4% GDP growth for 2010? Nothing good I would venture

Public Library said...

The market is rolling over. Our debt problems and over investment were never corrected.

Actually, they were made worse with government backed interventions of all sorts.

We didn't need more cars, houses, or insolvent banks yet we find ourselves up to the gills in all three.

Hang on to your seatbelts, cuz this here is the wildest ride in the wilderness!

I would love nothing more than to see Helicopter Ben get kicked out into the cold and an end to the Greenanke illusion.

At least Greenspan has seen the error in his ways...

Scott Grannis said...

Frozen: inflation is low because the demand for money, which in turn is being fueled by great fear and uncertainty, is high. Bond yields are falling because people are extremely concerned about the economy's ability to grow. Imagine what could happen if fears began to decline. Everything could reverse very quickly.

Frozen in the North said...


I know, the velocity of money is below 1, sure if/when it rises again there is a real risk of inflation, but that assumes that no action would be taken by the Feds. My gut instinct is that the Fed is better equipped for dealing with inflation than deflation -- come to think of it, what mechanisms are available to counter deflation?