REVEALED: The True Inflation Rate
The Federal Reserve has pursued its 2% inflation target with a monomaniacal determination… like a mad dog worrying a bone.
But it has largely been a juiceless pursuit… “as elusive as sheet lightning playing among June clouds.”
Inflation has bubbled a bit here, gurgled a bit there. But to limited general effect.
Headline inflation (including food and energy) sank from 2.9% last June… to 1.6% in January.
It is true that core inflation — excluding food and energy — runs somewhat warmer at 2.2%, annualized.
But the oven is nonetheless set to low temperature.
Experts dispute the causes — depressed worker wages obtaining from globalization, “secular stagnation,” a global “savings glut,” the astrological misalignment of stars and planets, etc.
Some accounts carry a greater plausibility than others.
We presently incline toward the astrological theory — but we are far from convinced.
Meantime, the February inflation numbers are due out tomorrow.
We expect no sharp departure from existing trends.
And they will likely offer the Federal Reserve additional justification to hold rates steady.
Here we speak of official inflation measures.
But is actual inflation vastly higher?
Yes, the Federal Reserve’s 2% sustained inflation hopelessly eludes it.
Yet assets such as stocks, bonds and real estate have been the scenes of dramatic inflation over the past decade.
The S&P — to take one example — has increased over 300% alone.
And therein hangs an epic tale…
Household net worth in these United States has increased some 73% since the Great Recession.
And Americans’ financial assets totaled over $85 trillion at the end of 2018.
Traditional inflation models exclude these asset prices.
But what if they were included?
The Federal Reserve’s New York headquarters hatched a model for that express purpose:
The “underlying inflation gauge,” or UIG.
This UIG incorporates not only consumer prices — but producer prices, commodity prices and financial asset prices.
Thus it promises a true inflation reading.
Claims the New York Fed:
The UIG proved especially useful in detecting turning points in trend inflation and has shown higher forecast accuracy compared with core inflation measures.
If we gauge inflation by this comprehensive model… the true rate of inflation substantially exceeds the Federal Reserve’s 2% target.
What is the true inflation rate as indicated by the UIG?
From 3.06% in December, it slipped to 2.99% in January.
The true inflation rate nonetheless exceeds the core rate by nearly one full percentage point.
The lesson, plain as eggs:
Inflation lives and thrives. But largely in assets.
And the Federal Reserve could have begun raising interest rates as far back as Bernanke.
Danielle DiMartino Booth, former aide to ex-Dallas Fed President Richard Fisher:
Had the Fed been using a 2% target based on the UIG, [former chairs] Janet Yellen and Ben Bernanke would have been compelled to raise interest rates much earlier than they did.
Sharpening the point is Joseph G. Carson, former global director of economic research at AllianceBernstein:
The UIG carries [an important message] to policymakers: The obsessive fears of economywide inflation being too low is misguided; monetary stimulus in recent years was not needed.
Obsessive fears of low inflation are misguided? Monetary stimulus in recent years was not needed?
This Carson heaves up strange and dangerous heresies.
The Paul Krugmans of this world will set him down as an agent of the Old Boy himself… and an enemy of civilization.
As well claim that Noah’s Ark did not house all the world’s species in duplicate… that George Washington did not fell the cherry tree…
Or worse — that gold is money.
But what if the UGI is correct?
Were decades of loose monetary policy an epic blunder?
Analyst John Rubino of DollarCollapse.com:
The really frustrating part of this story is that had central banks viewed stocks, bonds and real estate as part of the “cost of living” all along, the past three decades’ booms and busts might have been avoided because monetary policy would have tightened several years earlier, moderating each cycle’s volatility.
But if the actual inflation rate runs to 3%… what does it portend for the economy?
When this underlying inflation gauge crossed 3%, Zero Hedge reminds us, recession and bear markets often follow.
At 2.99%, it is currently hard against the 3% threshold.
So here we welcome our old colleague Catch-22 to the proceedings…
If the Federal Reserve resumes rate hikes at this late point, it would likely trigger a major stock market sell-off.
But if it does not raise rates, the true inflation rate will once again exceed the critical 3% mark, inviting recession… and a market sell-off.
Thus the Fed appears damned if it raises rates — and damned if it doesn’t.
But either way… damned.
Managing editor, The Daily Reckoning