Well, it seems to be just about official: Inflation ex-inflation has formally become the policy of the Federal Reserve.

At least, according to voting Fed Governor Frederic Mishkin, who tells Bloomberg that Inflation Minus Food, Energy Is a `Better Guide’.

When reading his statements, I am reminded of the former Fed Chair Arthur Burns, who in the 1970s similarly did not want to include energy and food prices in his inflation measures. That "experiment" ended rather disastrously, with flat growth, and very high inflation, a condition that came to be known as stagflation.

Growth isn’t as weak today, and inflation isn’t as pernicious. But we do have strong commodity price increases, with GDP growth significantly slowing in the US. Add a weak US dollar versus a basket of global currencies (see America vetoes G7′s dollar alert). Then bring 2 billion new consumers into the global economy from India and China. (see Ship Shortage Pushes Up Prices Of Raw Materials), Next, add a hot war in the Middle East. Last, a Treasury Department hellbent on increasing the money supply. That’s the formula for what I call "demi-stagflation," and what my colleague Jeff Saut at Raymond James calls "Agflation."

All I ask is for the entities that measure the goods and services that make up our economy, and the bureaucracies that set government policy to accurately portray them, and stop the absurd emphasis on the non-inflationary items.   

Here’s the ubiq-cerpt:™

"Federal Reserve Governor Frederic Mishkin said inflation measures that exclude food and energy costs are a "better guide” to underlying changes in prices.

Changes in price indexes without food and energy "provide a clearer picture of underlying inflation pressures,” Mishkin said in the text of remarks to the HEC Montreal Macroeconomics and Monetary Policy Conference today. “If the monetary authorities react to headline inflation numbers, they run the risk of responding to merely temporary fluctuations.”

Mishkin argued that both so-called core and headline measures of inflation are useful to policy makers and the central bank shouldn’t rely on any one gauge. Sustained increases in energy costs can push up expectations for inflation, he said, noting that recent gains in oil are a "reminder that shocks can persist longer than one might have first expected.”

Does a 5 year run in energy prices and other commodities count as sustained?

The emphasis on Inflation ex-inflation continues . . .

>



Source:
Mishkin Says Inflation Minus Food, Energy Is a `Better Guide’
Craig Torres and Greg Quinn
Bloomberg, Oct. 20 2007
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aohaOKFSvu.I

America vetoes G7′s dollar alert
Edmund Conway
Telegraph 1:19am BST 22/10/2007
http://tinyurl.com/33k3so

Ship Shortage Pushes Up Prices Of Raw Materials
ROBERT GUY MATTHEWS
October 22, 2007; Page A1
http://online.wsj.com/article/SB119301028152866449.html

Category: Commodities, Energy, Federal Reserve, Inflation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

46 Responses to “Inflation ex-inflation to be Official Fed Policy?”

  1. Old Ari says:

    If you want to keep your job, do as your boss tells you.

  2. Neal says:

    “…recent gains in oil are a “reminder that shocks can persist longer than one might have first expected.””

    Somewhere in the land of the Federal Reserve there is a magic oil well that promises unlimited oil til the end of time. There is also a magic copper mine, magic farm field, and magic consumer that is neer exhausted.

    That’s the only conclusion I can come to.

  3. Karmakin says:

    You know, there’s a reason why people like me don’t take these guys seriously and believe that they have NO idea what they’re doing, that the entire economic engine is broken, and that is hurting an awful lot of people.

  4. Unsympathetic says:

    Precisely why should my tax dollars pay the salary of some shmuck who refuses to pay attention to the realities of life in this country? Congress should fire the Fed employees. Paulson, Mishkin, the lot of ‘em. Bush can appoint another sycophantic group all he wants, but this has to stop.

    At what point is it remotely justifiable for the secretary of the treasury to be running around asking other countries to buy something he refuses to describe?

    http://financialpetition.org

  5. The Dirty Mac says:

    I am reminded of the newspaper headline in the Bugs Bunny cartoon: “Meat Prices Soar, Consumers Also Sore”.

    I can understand discounting monthly price fluctuations. A secular trend is something entirely different.

  6. IM says:

    Just a quibble, but actually there was no flat growth in the seventies in the U.S.A. Growth in the seventies was higher than in the 80ties and 00ties and about the same as in the 90ties.

  7. lee says:

    Reminds me of the go-go internet company I worked for in the 90′s: the company never made any money but the stock kept rising (at one point it had a 30 bil market cap!) because of a fictitious measurement called “EBITDA” earnings. Naturally the company ended up bankrupt.

  8. John says:

    As every statistician knows, the way to construct an average from a set of factors that have different variabilities is not to throw out the most variable ones but to weight them less than the other ones. Here you’d weight food and energy less than their “market basket” fraction might indicate. If food and energy are 40% more volatile than everything else, they would get a weight of 1/1.4^2 = 1/2 (roughly) of what their market basket share would indicate.

    This is pretty elementary statistics, and the fact that the Fed and BLS aren’t doing it for these metrics is, uh, not so good.

    ~~~

    BR: FYI: Housing is 38% of the core inflation rate . . .

  9. F. Frederson says:

    Fed to the American people: you know that life you live every day? It doesn’t really matter compared to bonus season on Wall Street.

  10. Rob says:

    Except what can the Fed do about energy prices? Its a supply shock combined with overall demand increase. All the Fed could try to do is lower demand through raising interest rates and send the economy into a recession. I’d prefer higher energy prices over that.

  11. scorpio says:

    exactly. i think you have to throw out lots of past comps as indicators. we’ve never had a Fed like the last 10 years, where EVERY action is dictated by the fortunes of Wall St. folks in the market prior to 1997 NEVER talked about Greenspan Puts, or Bernanke Puts. w the exception of Arthur Burns cravenly stimulating the economy on behalf of Nixon, most FRB governors historically believed in letting the market sort itself out while they paid first attention to the overall economy. this FRB will sacrifice its credibility re the US $ and generally understood definitions of inflation on the altar of mark-to-mythology.

  12. msn says:

    So why not just use a 6 or 12 month moving average for food/energy inflation to smooth out temporary fluctuations?

    What am I missing here?

  13. karl smith says:

    What I don’t understand is why Barry, who is clearly a very smart man, continues to talk about this issue without acknowledging the policy trade-off.

    Is the inflation ex-inflation crowd arguing for a tighter monetary policy? If you want to focus on headline inflation in the Taylor Rule then you have to be arguing for an increase in the funds rate.

    The current rate only follows if you believe that core inflation is the figure to focus on right now. Does anyone honestly believe that we need rising interest rates at this moment?

    Indeed, the FED would have to be playing it a little fast and loose to offer further cuts even with the core at current level. Unemployment has not edged past full employment and even the core is riding slightly above the comfort zone.

    ~~~

    BR: I understand the trade off — but I don’t think the Fed can have a serious debate about the trade-offs until they are more honest about the inflation risks.

    IMO, that dishonesty about inflation risks is what led to rates being taken down to ultra-low levels, and kept there too long. Had they acknowledged those risks and acted differently, we might not be looking at $90 Oil.

  14. zao says:

    Changes in price indexes without food and energy “provide a clearer picture of underlying inflation pressures,” Mishkin said in the text of remarks to the HEC Montreal Macroeconomics and Monetary Policy Conference today. “If the monetary authorities react to headline inflation numbers, they run the risk of responding to merely temporary fluctuations.”

    Mr. Mishkin, quit the double talk. How come a large swing (down only) in something as “temporary” and “transient” as financial markets prompts you to take action immediately. OTOH, a multi-year rally in commodities might be transient and therefore to be ignored. How come commodity rally is noise. While a big down in stock market is a reliable signal (that economy is going down) to cut. of course the market came back fast. So what is signal and what is noise?

  15. Darin says:

    Since demand for dollars is so high given the increasing demand for commodities across the globe, how does that figure when compared to the 1970′s and moentary base expansion. It would seem that to some extent, the US is actually required to increase the dollars in circulation just to keep up with the increasing number of consumers…similar to your thesis on the BLS death/birth model. Any ideas?

  16. KP says:

    Everyone knows that moving averages would eliminate the noise that they claim to be concerned about. There has to be another reason for leaving it out, and I’d sure like to know…cause right now I am thinking it’s to water down the inflation numbers. Why would they wish to water down the inflation numbers? That’s where it gets really interesting.

    Any way you slice it, excluding F&E at this stage in the game is dishonest. Nothing volatile about an exponential curve folks.

  17. KP says:

    I think I may have just answered my own question…

    http://tinyurl.com/2ahcsc

  18. zao says:

    karl,
    your question is a relevant one. However, even the Taylor rule does not advocate rate hikes. The CPI inflation is 2.8%. Growth is 1-2%. Let us say 1.5%. Taylor rule would say 2.8%+1.5%=4.3%. Even 2% real growth equals 4.8%. Assumption is that the economy is operating a little below capacity and inflation a little above, a wash.
    The more important question is whether they should cut a lot, just like they did in 2001-2003. The Taylor rule says no.

  19. David Price says:

    Hi Barry, The Fed will do what is best for the Fed!

  20. Eddie says:

    Just went to Outback this past Sunday evening. Two things to note:

    1. It was packed on a Sunday. People clearly still have plenty of money to spend.
    2. Dinner for two was almost $50. A couple of years ago that same dinner cost less than $40.

  21. Remus Shepherd says:

    I think if you look at the unemployment numbers you’ll find a lot of the same thing going on. They are counting the unemployed, subtracting the unemployed.

    Why does it seem that the main purpose of government economists is to mask how sick our economy really is?

  22. WorldBeta says:

    Check out my recent post on World Beta – examines gold prices moved 14 months forward to CPI. Looks like CPI going much higher. . .

    http://worldbeta.blogspot.com/

  23. Winston Munn says:

    I have a question.

    Debt in and of itself is not a bad or evil thing – some degree of debt is indeed beneficial for large scale projects (housing and cars on a peronal level; infrastructure and promoting technological advances on a national level). However, there reaches a point where debt becomes self-defeating, and that is when current revenues can only provide for current interest due.

    I believe it is a given that everyone would agree that a reasonable definition of debt would be “a claim against future productivity”. It would seem to me that at the point where debt claims equate to all future productivity gains, growth cannot be sustained. At that point, the only growth that can occur is by an increase in debt, which is then dependent upon rising assets to roll over this debt – classic Ponzi financing, which would lead to bubbles and what Mises called “crack up booms”.

    It seems to me that deflation is not only survivable but may well lead to a more prosperous end – deflation contains a natural cap on its depth, as money will never reach infinite value; however, inflation has no such cap, and currency can reach zero worth.

    So my question is this: If inflation is a silent tax that cuts deepest into the middle and lower classes, yet deflation lowers the cost of debt, ecourages savings, and increases in the long term the standard of living for these same middle and lower classes, which is the greater enemy? And why, then, is deflation so feared by those in powerful positions?

  24. UrbanDigs says:

    at what point do higher energy prices become ‘self-limiting’?

    The reason these items are usually excluded is because they are considered to be:

    1. Transitory, or temporary and not lasting
    2. Self limiting

    It’s clear that both #’s 1 & 2 have not been applying for the past 3 years!

    So, the debate that excluding these items gives a better idea of inflation seems ‘out of date’ to me. If we do exclude them, we are not getting the real picture and as Fed President Richard Fisher states:

    “Both food and energy have had a steep upward tilt for the last three years in a row. Under those circumstances, I’m personally reluctant to put complete faith in the core measures because they may be removing more signal than noise.”

  25. MrBernenke_TearDownThisCPI says:

    Anyone care to guess how many times Starbucks will increase prices in calendar 2008? Only once? (this, after two price hikes in 2007)

    Or are volatile milk prices sure to come down?

  26. S says:

    deflation is so feared becasue if companies start getting lower prices i.e. massive margin compression they begin to default on those “underleveraged” balance sheets thereby stoking a viscious death spiral..why Japan has never moved aggressivily to clean up the bad debt issues..better to euthanize the companies and move on, but don’t hold your breath. We are a palliative stroke egalitarian society.. Per the Fed, better to subtly devalue the American way via pernicious inflation – hey they have gotten away with it so far…

  27. Unsympathetic says:

    ” If you want to focus on headline inflation in the Taylor Rule then you have to be arguing for an increase in the funds rate. ”

    Or, withdraw the 23A exemption letters. Problem solved.

    And, of course, Citi is immediately insolvent. Whoops – too bad, thanks for playing. Mr. Prince should be Ken Lay’s cellmate.

  28. Kp says:

    Mr. Munn you are spot on as usual.

    And why, then, is deflation so feared by those in powerful positions?

    If you assume that powerful people’s wealth is tied to asset prices, and corporate profits….deflation would not retain their net worth quite as well as the alternative.

    Your government is a tightly held corporate asset.

    When something doesn’t make sense…always follow the money.

  29. a guy called john says:

    Five years ago I gave up cow’s milk for a variety of reasons. As I recall, the price of a gallon of soy milk then was $4.99. This morning I went to my local subsidiary of Safeway down the block and saw it $6.99. It’s been a nice, un-volatile upward trend over the last five years.

    On another topic, organic fruits/veggies have gone through the roof. It’s unsane. I find it interesting that the gov’t standardization of the “organic” label was supposed to simplify the production process and result in lower costs as traditional grocers/manufacturers would jump in. Pffft. Reminds me of how the price of CDs was going to go down once critical mass was reached on the demand/supply sides. Too bad I can’t BitTorrent an avocado…

  30. Strasser says:

    Oops… they forgot to x-out tuition!

    “Oct. 22 (Bloomberg) — The annual cost of attending a private four-year college in the U.S. rose 3.9 percent to $32,307 for this school year, the biggest inflation-adjusted increase since 2001, the College Board announced today.

    School officials may have raised prices in anticipation of a higher inflation rate, said the report’s chief author, Sandy Baum…”.

    Hmm… thought we didn’t have infaltion. I’m so confused.

  31. Stormrunner says:

    Winston asked

    >>And why, then, is deflation so feared by those in powerful positions?

    Not that I would really know but my guess is that being that the FIRE economy represents 90% of the balance of payments while the Production/Consumption economy or “Real” economy only represents 10%, the FED is actually beholden to the banking system which has “misallocated” huge amounts of credit to investment banks whose representatives now occupy top management seats of nearly every Government finance related office deflation can not be allowed until the clear winners are chosen hence M-LEC.

    Given the repeal of Glass Steagal mis-allocated qualifies for understatement of the year stolen would be more appropriate.

    http://www.cftech.com/BrainBank/SPECIALREPORTS/GlassSteagall.html#anchor854514

    Provisions of the Glass-Steagall Act were directed at these abuses:
    (1) Banks were investing their own assets in securities with consequent risk to commercial and savings deposits. The concern of Congress to block this evil is clearly stated in the report of the Senate Banking and Currency Committee on an immediate forerunner of the Glass-Steagall Act.
    (2) Unsound loans were made in order to shore up the price of securities or the financial position of companies in which a bank had invested its own assets.
    (3) A commercial bank’s financial interest in the ownership, price, or distribution of securities inevitably tempted bank officials to press their banking customers into investing in securities which the bank itself was under pressure to sell because of its own pecuniary stake in the transaction.
    Every one of these abuses was known and repeated lending enormous credibility to the warning of Catherine Austin Fitts and her fitting description of a Tape-Worm Economy. Having worked at the administrative levels of HUD it is her contention that these bubbles were economically engineered to skim large sums of capital from the US to build manufacturing abroad to advantage the labor arbitrage.

    http://media.aprn.org/2007/toa-20071016.mp3

    Cynical obviously, outrageous maybe, impossible not likely.

  32. S says:

    Stormrunner

    couldn’t agree more

    Asset deflation vs price deflation; the first hits the balance sheet in the form of writeoffs the second is the leach that slowly bleeds you

  33. paul says:

    Uh, are you saying that the Fed should have pursued even tighter-money policies during the 73 and 79 shocks than they did?

  34. Two answers to some of the comments above:

    1) Its not just food + energy — its also Housing, health care, education, insurance, materials, etc.

    2) I understand the trade off — but I don’t think the Fed can have a serious debate about the trade-offs until they are more honest about the inflation risks.

    IMO, that dishonesty about inflation risks is what led to rates being taken down to ultra-low levels, and kept there too long. Had they acknowledged those risks and acted differently, we may not e looking at $90 Oil.

  35. zao says:

    Barry,
    See the following presentation by John Taylor showing how the Fed deviated substantially from the Taylor rule (and its own history) in cutting rates/holding them low in relation to where they should have been in first half of this decade. He alludes to similar behavior in the ’70s but stops short of saying that it landed them in trouble.

    Paul, Yes, they should have run tighter policies in response to the oil shocks in the 70s. Horrified? Guess what. Bundesbank in Germany did just that and came out with inflation much lower than US and growth not worse.

    http://www.kc.frb.org/PUBLICAT/SYMPOS/2007/PDF/2007.09.04.Taylor.pdf

  36. m3 says:

    Winston asked

    >>And why, then, is deflation so feared by those in powerful positions?

    the 1930′s were so traumatic that even the discredited keynesian views that came from it dominated all gov’t and public policy since.

    the fed’s last war was against inflation, but it paled in comparison to the suffering and world war that came as a result of deflation in the 1930′s.

    inflation is the lesser of two evils in the US experience, but historically speaking inflation has always been the greatest threat. if we lived in germany or zimbabwe, we’d probably have a different opinion.

    americans have never been good students of history, so i guess we’ll have to learn the hard way.

  37. alexd says:

    I want to know who leases the helicopter to the Fed?

    I know someone will feel the burr under their saddle but since we have less so called social safety nets than some of the European countries their seems to be a disincentive to raise rates because as more and more people suffer the effects of a slowing economy they will become disenfranchised and vote for the other political party, so why shoot yourself in the foot? Not to mention the stock market might go down to then those who own stocks will not be happy either.

  38. SAM says:

    2 billion NEW consumer from chindia??

    come on BR, don’t tell me they were not consuming before.
    This yr is the last hoorah for emerging.

  39. Of course they were consumers — but the question is whether they were previously consuming goods from the global marketplace, or merely locally sourced materials.

    A farmer eats some rice he grew and a chicken he raised. That should have little if any impact on global supplies or prices.

    The thinking is as these formerly local consumers of local food (produce, milk, beef, chicken) energy, coal, timber, etc. move away from the farms to cities and urban areas, the people in these formerly agragarian economies are now where they buy goods and services from the international markets.

  40. Fullcarry says:

    One of the biggest fallacies out there is that the FED fears deflation. The FED is the engine of inflation. And the only thing it fears is people wising up to its constant and never ending inflationary policy.

    The idea that the FED fears that its money might systemically become more valuable is hilarious.

  41. Winston Munn says:

    IMAGINE

    By

    Frederic and the Feds

    Imagine no inflation
    It isn’t hard to do
    No milkshakes and no ice cream
    We’ve substituted gruel

    Imagine all the people
    riding bikes each day, oooh-oooh

    You may say I’m a dreamer
    But I’m not the only one
    Some day you’ll thank us
    When inflation’s less than one

    Imagine no inflation
    in a brand new world
    no trade wars to deter us
    labor begging at the doors

    No upward pricing spiral
    unless hedonistically allowed oooh-oooh

    You may say I’m a dreamer
    But I’m not the only one
    Some day you’ll thank us
    When inflation’s less than one.

  42. Stormrunner says:

    >>The idea that the FED fears that its money might systemically become more valuable is hilarious.

    Very funny yes in the long term and is why I stated

    “deflation can not be allowed until the clear winners are chosen hence M-LEC.”
    The wrong move at the wrong time would crush some very connected players.

    I would have to imagine that some extremely influencial member banks have serious exposure to this off balance sheet delemma. Until this is resolved and confiscations of real assets will more than “over” compensate, their tools which are the FED and Treasury will do everything possible to keep the liquidity flood gates open, even a special conduit or two. Of course being that the balance of payments between the two eco’s is 10 to 1, its going to take some serious shuffling to get the worthless 90% into the right hands -ie the unconnected players. If one believes this debaucle was engineered, then an exit strategy must have been planned. To discover this would seem tradable. If one believes this was just poor oversight and happenstance we certainly do then live in a idiocracy and are doomed.

  43. Winston Munn says:

    “If one believes this debaucle was engineered, then an exit strategy must have been planned. To discover this would seem tradable. If one believes this was just poor oversight and happenstance we certainly do then live in a idiocracy and are doomed.”

    We’re frickin’ doomed!!

  44. Shrek says:

    The BIGGEST scam going right now is the belief that asset price inflation is not a concern for monetary policy. Maybe the fed assumes that we are so far into the scam and that it is too scary to turn back. What is the difference between asset price inflation and CPI inflation? nothing, its still the result of massive credit growth and monetary dillution. The reality is the US has been inflating for years! just for the most part it was in things the fed left out of its inflation definition. This is going to eventually come to light and rock this whole system.

  45. m3 says:

    scary question:

    can (or would) the fed create its own SIV?

  46. oleg says:

    Would you comment on GDP deflator as well? Any conspiracy there? Any comments on computer prices?

    ~~~

    BR: I do not believe BLS CPI or NFP is a conspiracy; its just the bias of their models overstates growth and understates inflation.

    I have commented enough on technology deflation; Use the Google searchbox at top right