Economics, Monetary Policy, Pethokoukis

Another mild inflation report that will probably fail to persuade the inflationistas…

Credit: David Beckworth

Credit: David Beckworth

What should the Fed do next? Something to consider: Economist David Beckworth correctly notes that a) long rates started rising several weeks before Fed Chairman Ben Bernanke’s “tapering” comments, and b) long rates on safe sovereign assets around the world are going up and are doing so in a similar manner. So what does the broad rise in rates mean? Beckworth:

How about an improved economic outlook? We are now halfway through 2013 and the U.S. economy has been relatively resilient to fiscal austerity and Japan’s first quarter growth has been better than expected. Maybe investors see these developments and are becoming increasingly more confident. If so, they would be rebalancing their portfolios accordingly and, in the process, driving up the natural rate of interest. … Note the implications of this understanding. If monetary policy does spark a robust recovery it should lead to higher interest rates, not lower ones. Higher yields mean, then, that QE3 is working. Chairman Bernanke made this very point at a prior congressional hearing … For him to even consider tapering implies he believes a solid recovery may be finally taking hold. But, by his own admission, a solid recovery means higher interest rates. Commentators, therefore, should be viewing his tapering talk and higher yields as a sign of progress, not as a sign of Fed tightening.

One data point: US monthly job growth averaged 178,000 in the eight months before Bernanke announced the latest round of quantitative easing and 198,000 in the eight months since. And that improvement despite the fiscal cliff tax hikes plus spending sequestration.

But the labor market is still healing, and as today’s benign inflation data showed, rising prices shouldn’t be much of a concern. IHS Global Insight:

The CPI firmed 0.1% in May as gasoline prices were unchanged. Food prices drifted down 0.1% and recovery in wellhead natural gas prices filtered through to push electric rates higher and lift the cost of piped gas. Core prices, excluding food and energy, drifted up 0.2% rather than the 0.1% gains of the prior two months, but a two-month average is still 0.1% as the acceleration is just noise and rounding effects. Indeed, it is a commentary on how tame the CPI is that anyone would even notice a 0.1% firming to 0.2% in the monthly core CPI. ..The overall consumer price picture is quite flat — near roughly 1.5% annual inflation, down from about 2% a year ago.

Again, given low inflation and the large job and output gaps (vs. the pre-recession trend), there seems little policy need for tapering of any sort.

4 thoughts on “Another mild inflation report that will probably fail to persuade the inflationistas…

  1. Inflation is deader than Jimmy Hoffa.

    Why the peevish fixation on inflation? I can’t answer that.

    In the 1970s, you had unions, a top tax rate of 91 percent, and heavily regulated telephones, transportation and banking, and huge and powerful domestic manufacturers and retailers in world of little foreign competition. And Arthur Burns, who declared defeat in the war on inflation.

    So, we had a perfect storm for inflation, and it got into the double digits. Not hyperinflation, but double digits.

    A lot has changed since then, for the better actually. We are far, far less inflation prone than then.

    The Fed has yet to adapt to the new world. They should be printing money like crazy, and monetizing federal debt to the moon.

    How often can you pay off the national debt with greenbacks and not cause inflation?

    This is a golden opportunity….

    • Why the peevish fixation on inflation? I can’t answer that.

      Because the inflation of the money supply has created the biggest bubble in human history and the purchasing power is at risk once the bubble breaks. The fact that the Fed’s inflationary policies create a bubble in housing or treasuries does not mean that we can ignore events because oil is only $100 a barrel and copper is selling for $3.15 a pound.

  2. Weimar Germany was in deflation right up until the hyperinflation event began.

    I don’t expect Weimar, but things can turn quickly. If confidence in Treasuries wanes, and if buyers become sellers, you have a big problem in a hurry.

    If people suddenly want to sell treasuries the Fed can either stand by while interest rates soar (witness soaring interest rates and economic depression in southern Europe) or start buying treasuries en masse to compensate for the selling. The latter action would flood the market with dollars and bring about major inflation.

    Could the fed stand by and allow interest rates to soar? If not then look behind door number two.

    • Could the fed stand by and allow interest rates to soar? If not then look behind door number two.

      The Fed is trapped. Bernanke’s mixed messages are driving volatility through the roof and ensuring that future reports, no matter how much they are massaged, will have to show a level of weakness that the market is not counting on. Higher rates will force mortgage applications lower and will eventually drive housing down again. Combine that with the terrible jobs situation and it is very possible that we can see a major implosion in the equity markets and a resumption in the currency bear market.

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