Monday, February 20, 2017

Will Trump End Up Manipulating Price Inflation Numbers?

Although there are elements among Trump fanboys that believe President Trump will fight the Fed, all indications are that Trump is actually an advocate of the Fed as an activist interest rate manipulator.

In May of last year, Trump told George Stephanopoulos of ABC News that he is a "low interest rate guy, " doubling down on what he told CNBC a few days earlier.

This year, speaking at the annual meeting of the World Economic Forum in Davos, Anthony Scaramucci, who has since been named Assistant to President Donald Trump, said US policymakers must be “careful” about the rising dollar, taking a direct stab at the Federal Reserve.

“The Fed has to be independent and we have to be careful about the rising currency”, Scaramucci said.

The Trump administration thinking, of course, is that raising interest rates will make the dollar stronger.

And Trump, himself, in January, just days before taking office,  told The Wall Street Journal that the dollar was "too strong."

The problem with Trump's low-interest rate position, or at least one problem of many, is that price inflation is now starting to bump up against the Fed's "target" price inflation rate of 2.0%.

The Consumer Price Index has been, on a seasonally annualized basis, above 2.0% for the last two months.

And although the Fed gives greater consideration to other inflation measures, the trend with all of them has been clear since the end of the oil price collapse: higher. It appears likely that it is only a matter of time before all measures are above 2.0%. At that point, based on Fed thinking, they will want to be more aggressive in their interest rate hikes.

This brings about the question of whether the Trump administration would manipulate the inflation indexes to justify its low-interest rate advocacy.

They are already moving in that direction with other macroeconomic data.

There are reports that the Trump administration may have the Labor Department switch the reporting of the headline unemployment number from the current U3 data point to the U5. Based on this move, the U.S. unemployment rate would jump on a headline basis to 5.7% from 4.7% overnight--justifying a looser Fed interest rates policy in the eyes of the Trump administration.

More concerning is a new report out by The Wall Street Journal that says that the Trump administration is considering changing the way it calculates U.S. trade deficits, a very edgy (read: dishonest) shift that would make the country’s trade gap appear larger than it has in past years.

The leading idea under consideration, according to the Journal, would exclude from U.S. exports any goods first imported into the country, such as cars, and then transferred to a third country like Canada or Mexico unchanged.

This approach would inflate trade deficit numbers because it would typically count goods as imports when they come into the country but not count the same goods when they go back out.

The Journal continues:
A larger trade deficit would give the Trump administration ammunition in arguing that trade deals need to be renegotiated, and might help boost political support for imposing tariffs.

Career government employees objected last week when they were asked to prepare data using the new methodology, according to the people familiar with the discussions. These employees at the U.S. Trade Representative’s office complied with the instructions, but included their views as to why they believe the new calculation wasn’t accurate.

One person familiar with the discussions said the employees were told the new calculations were to be presented to members of Congress.

The effect of such a change would be particularly stark on data involving countries that have free trade deals with the U.S., this person said—and in some cases the new methodology could even change a trade surplus into a trade deficit.
Which raises the question: Should we classify the Trump administration as activist data manipulators yet?

With these early activist data steps by them, it is a necessity that price inflation data be monitored closely for any changes in methodology. There are no indications that Trump officials have demanded any changes at the Bureau of Labor Statistics in price inflation indexes yet, but if price inflation continues to accelerate, as I expect it will, one wonders what surprise the Trump team will have in methods for determining price inflation indexes.


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