Monday, January 12, 2015

An Historical Look at Price Inflation and the Future Price Inflation Prognosis

By Robert Wenzel

Most members and staff economists of the Federal Reserve Open Market Committee, the body that sets monetary policy, appear to be working under the assumption that because price inflation at the present time is, as measured by government statistics, under 2% that this trend is likely to continue.

From the minutes released of the December 16-17, 2014 FOMC meeting:
The staff's forecast for inflation in the near term was revised down to reflect the further large energy price declines since the October FOMC meeting, which were anticipated to lead to a temporary decrease in the total PCE price index late this year and early next year. The staff's inflation projection for the next few years was essentially unchanged; the staff continued to project that inflation would move up gradually toward, but run somewhat below, the Committee's longer-run objective of 2 percent.
It is difficult to understand what the Fed is basing this on other than simply projecting out the current trend. How sound of a method is this? One need only look at the 1960s and 1970s to understand the problems with this type of projection.

From 1960 to 1965, prices climbed at an annual rate below 2.0 percent Starting the period with a climb of only 1.4 percent in 1960. By 1969 the inflation rate was at  5.9 percent and by 1979 it hit 13.3 percent.

It is simply very dangerous and sloppy to think that because inflation has not been strong for a number of years that it won't be strong in the future, especially given the amount of new money that has been pumped into the economy, and that the pre-2008 financial crisis already showed a period of significant price inflation acceleration.

Clearly, the financial crisis and recession suffocated the price inflation, but as I have pointed out that recession is now long gone and we are in the midst of a new Fed manipulated boom. This boom will eventually result in consumers loosening the wallets that they have been holding on to ever so tightly since the 2008 crisis, when that loosening of the wallets accelerates, the price inflation will return.

Consumer confidence is climbing. It's a sign that the wallets are starting to open up. The accelerating price inflation is likely not very far away.

 Robert Wenzel is Editor & Publisher at and at Target Liberty. He is also author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics

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