The Fed’s inflation target (using the core personal consumption deflator) has been 2% for quite some time. It’s been below that rate since May 2012. At last week’s press conference, Fed Chairman Ben Bernanke said that the FOMC is considering setting an inflation floor. If inflation falls to or below this lower bound, then the federal funds rate won’t be raised even if the unemployment rate continues to decline. He added, “I mean, that we should be very reluctant to raise rates if inflation remains persistently below target and that's one of the reasons that I think we can be very patient in raising the federal funds rates since we have not seen any inflation pressure.”If productivity climbs, there is a natural tendency for prices to fall. This is a good thing, think falling personal computer prices, big screen televisions and smart phones.
It’s not obvious to me why Fed officials want to boost inflation. The recent decline in inflation has been led by such goods as airfares, used cars, and furniture and bedding. The biggest plunge has been in medical care commodities inflation. Medical services inflation has also been falling. On the other hand, tenant rent inflation rose during August to 3.0% y/y, the highest since May 2009.
Why would it be good for the economy to have rents rise faster? Do Fed officials really want medical care inflation to rebound? These are questions that the Fed chairman did not address in his press conference.
That said, Bernanke may get his wish for higher prices much sooner than he anticipates. Although he uses the core personal consumption deflator to identify price inflation,the real-time price inflation index, the MIT Billion Prices Index, though it fluctuates, is over 2.0% already.
See also the "Everyday Price Index" put out by the American Institute for Economic Research, at https://www.aier.org/epi
ReplyDeleteThe Bernanke wants lots of inflation so those debts can be paid in cheaper dollars.
ReplyDeleteBernanke wants inflation? Why doesn't he stop paying interest to the banks for the $2.3 trillion in excess reserves? Or even charge a fee. We'd get inflation up the wazoo.
ReplyDeleteBetter yet, why not deposit $1 million in everyone's bank account today. Think of all that wonderful inflation we'd get! Prosperity for all.
This is insanity. These idiots in Washington seem intent on blowing up the economy and impoverishing most of the developed world in the process.
Shadow Stats puts inflation at just under 10% when calculated as it was in 1980 and at 5% when calculated as it was in 1990.
ReplyDeleteLiving outside of the states and doing most of my purchases by credit card when inside the States, I was embarrassed and shocked yesterday when I neglected to bring my wallet to the store, but assumed I had plenty of cash.
ReplyDeleteAt the checkout, I confidently handed a twenty to the cashier, thinking that it would easily cover a few beers (on sale!), and two bags of chips. HA!
Twenty bucks!?!?!? Try $34.00!!!!
Man, I've been living in a fool's paradise.
Been waiting for years for some heavy commodity inflation...please go ahead. Kinda hard for me to switch my career and portfolio 180 degrees at this juncture....please inflate away Fed!
ReplyDeleteMany renters have been sitting out The Housing Bubble, renting and saving.
ReplyDeleteAll the landlords I know love to spend.
That could be a reason they want to raise rents.