Sunday, August 23, 2015

Has Price Inflation Really Been Stable in the U.S. Since 1985?

Well yes, if you consider a bucking bronco ride equivalent to the ride in a chauffeured limousine.

I have received a couple of emails questioning the implied idea in my recent post, The Delusional San Francisco Fed, that price inflation has been unstable since 1985, The emailers argue that the slope of the inflation curve has been stable.

TLet's take a look.

In 1990, price inflation peaked at 6.1%, from a low of 1.1% in 1996. It fell to 2.5% in 1995, then climbed to 3.3%. Then dropped to 1.6% in 1998, only to climb to 3.4% two years later. It then dropped to 1.6% in 2001, but climbed to 4.1 by 2007. It then collapsed to 0.09% in 2008. Only to climb to 3.0% in 2011. Now, it is on another downturn.

Price inflation, in other words, has been all over the place. Further, with a large degree of mystery as to how they arrived at it, the Fed now holds the view that "target" inflation should be 2.0%. If we use this measure to asses past Fed performance, it is an abject failure. In the chart below, the red line shows the Fed 2.0% "target" level. Price inflation has merely passed by the 2% "target," on its way to much higher, or lower, levels.

I hasten to add that from my perspective the idea that a central bank should adopt a "target" inflation rate is bizarre. Why is price inflation ever good, never mind as a policy guideline?  It is Keynesianism, as if interpreted by Dali, with the definitive report on Dali's inflation target lecture then written by gonzo author Hunter Thompson.

Indeed, I am quite certain that the price inflation volatility in the chart below would look like a stable straight line to Dali and Thompson.


1 comment:

  1. Even the gunvernments BLS inflation calculator says the dollar has lost 55% of it's purchasing power since 1985.