Why Consumer Prices Are Flat Despite Fed Stimulus

Here’s the latest report from Bloomberg:

Industrial production in the US increased more than forecast in November and consumer prices slowed, indicating the recovery is gaining momentum without generating inflation.

Output at factories, mines and utilities rose 0.4 percent, the biggest gain since July, after a revised 0.2 percent drop in October, a Federal Reserve report showed today in Washington. The consumer-price index climbed 0.1 percent in November after a 0.2 percent gain the prior month, the Labor Department said.

Assembly lines are speeding up as business investment and exports grow and consumer spending accelerates, helping to buoy an expansion that Fed policy makers said yesterday isn’t strong enough to reduce a jobless rate hovering near 10 percent. Price increases that are below central bankers’ goal will boost the case to maintain the Fed’s purchases of $600 billion in securities through June to spur growth.

Fed Chairman Ben S. Bernanke “is unlikely to withdraw accommodation until he sees a clear upward turning point in core inflation and a downward turn in unemployment.”

Hold on.

Are you telling us that after the Fed increases the core money supply by 300%…and says it is going to up it another 100%…consumer prices are still flat?

Yes? Hmmm…

And are you saying that slowing consumer price increases show that the “recovery is gaining momentum?”

Are you kidding?

Oh, dear reader… What claptrap! What nonsense! What balderdash!

The feds make the biggest stimulus effort in history. The Fed pumps $1.7 trillion into the banking system…with a promise of $600 billion more.

And consumer prices don’t even budge? What happened to the most fundamental laws of finance? Have they been suspended? Have we entered some perverse, parallel universe?

Or does this mean what we think it means…that the downward tug of the Great Correction is so strong it overwhelms all the feds’ efforts…the zero percent prime lending rate…the $700 billion stimulus bill…the $1.3 billion federal deficit…QE I, QE II…

That’s no success story. That’s a disaster.

Of course, all this money has to go somewhere. And there’s no mystery about where it has gone. Commodities are hitting new highs. Oil seems headed back to $100 a barrel. Gold was over $1,400 an ounce.

Even US stocks are up about 25% this year.

As predicted, the feds’ easy money has gone into speculative assets…not into the real economy. That’s why one out of 10 people in the workforce is officially unemployed…and why, unofficially, it’s probably more like one out of every 5.

And it’s why consumer prices are NOT rising. Imagine what would happen if this were a real recovery? Imagine that the Fed increased the core money supply by 4 times. Imagine what would happen to consumer prices!

Poor Ben Bernanke must be tired of imagining. He will keep printing money – or so Bloomberg concludes – until he doesn’t have to imagine anymore. He’ll print until he reads about inflation in the paper!

But when will that be? How much wood pulp will Ben Bernanke have to chuck into the printer until consumer prices rise and unemployment falls?

We’ll find out!

Bill Bonner

for The Daily Reckoning