Wednesday, March 19, 2014

The Federal Reserve's Price Inflation Expectations

Here's a great chart which highlights the Fed Open Market Committee's price inflation forecasts for the next 2 years.

(Chart via Macro and Other Market Musings)

Note well that there is no expectation by the FOMC for price inflation to be significantly different than current level inflation. This is simply trend following, with no theory behind how price  inflation may change.

If the desire to hold cash balances declines, price inflation could soar.

Currently, it appears that the desire to hold cash balances is very high, but that could change dramatically in the future.

As I wrote in yesterday's EPJ Daily Alert:
The latest data from the Bureau of Labor Statistics shows the overall consumer price index increased by a seasonally adjusted 0.1% last month. Beneath the surface, though things are brewing.

The price of food jumped 0.4% — the largest gain since September 2011 — because of higher costs of meat, poultry, fish and vegetables.  Housing costs, the biggest expense for most consumers, advanced 0.2%. Prices also rose for medical care and airline tickets.

 From January to February, the prices that consumers paid for meat, poultry fish and egg climbed 1.2% (and are up 4% over the last 12 months), according to the data released this morning.

Suffice to say, people notice climbing food and housing prices.

And there appears to be no end in sight for climbing food prices, with beef leading the climb. The bigger beef bills are partially due to the fact that the cattle herd in the U.S. — the largest beef producer in the world — fell to an estimated 63-year low. But the price climb goes beyond beef.

Indeed, even the U.S. Department of Agriculture understands that food prices are headed much higher from here. It estimated last month that retail food prices will rise between 2.5% and 3.5% this year, up from 1.4% last year. I expect it could be much higher, perhaps 5.0%---and then things will really start to get interesting.

If consumers start to expect accelerating price inflation, it will lower the demand to hold cash---and that will  accelerate prices moves to the upside. But, we are not there yet. The overall price advance has been muffled by a decline in energy prices. Energy fell 0.5%, as lower gasoline costs offset increases in fuel oil and natural gas.

A big flashing warning sign, from another direction about potential price iflation,  is the climb in average hourly pay.  The average hourly pay of U.S. workers jumped 0.3% in February to mark the biggest increase since last April. The new money most assuredly is burning a hole in people's pockets and at some point the bidding war for goods and services will accelerate.
Exact timing on these things are always difficult, but the Fed's forecasts do not in anyway take into account the changes in the demand to hold cash---which is often the catalyst to accelerating price inflation that is ultimately fueled by massive increases in the money supply (which we already have).


  1. Ehhhhh Bob, you might want to check the dates on your chart.

    1. Duh, you might want to attempt to check your chart reading comprehension. The dates are of the FOMC meetings at which projections were made for 2 years out.

  2. Duh, Bob's post clearly showed he was looking at future inflation prospects and criticizing the Fed's forecasts. That chart says nothing about the Fed's current inflation forecasts. You might want to attempt to check your logic.

  3. My butcher told me that his supplier expects wholesale beef prices to be 3 dollars higher by the summer.

  4. I recommend that with now a trade lower in the price of Gold, $GOLD, lower from $1380, that one start to dollar cost average, an investment in the physical possession of Gold Bullion, as gold is going much higher in price as Robert Wenzel suggests. Gold is going to experience great price inflation as an investment demand for gold will commence as competitive currency devaluation commences a see saw destruction of equity investments and credit investments. Gold is the defacto safe haven invesment in times of economic destabilization. The investment principle is “In a bull market, like the one currently in Gold, GLD, one buys in dips, but in a bear market, one sells into pips. Of note, gold mining stocks, GDX, are trading strongly lower in value; and with a PE of 34, are greatly overvalued.

    More investment analysis and inflation comments, based on the dispensation economics viewpoint, can be found in my current post here li

  5. Wrong chart dates.