Flashback to June 2008 (only three short years ago):

Headline CPI was running very close to 5.0 percent.  The Fed funds rate was at 2.0 percent.  Brent crude was $132/barrel.  The Fed’s June 2008 minutes mentioned the word “inflation” 110 times (“deflation” and “disinflation” combined:  zero), and also contained this caveat (emphasis mine):

With increased upside risks to inflation and inflation expectations, members believed that the next change in the stance of policy could well be an increase in the funds rate; indeed, one member thought that policy should be firmed at this meeting.

And CNBC reported (in May) that:  “One-year inflation expectations surged to 5.2 percent — their highest since February 1982 — from 4.8 percent in April.”

Fast forward one year:

Headline CPI was -1.2 percent (so much for the public’s ability to foretell inflation trends, but who didn’t know that?).  The Fed funds rate had been lowered to its current range of 0.00 – 0.25 percent.  Brent crude was $69/barrel.  The Fed minutes were, amazingly, discussing “reduced concerns about deflation.”

Current day:

Bernanke’s prepared remarks and Q&A on Wednesday mentioned the word “inflation” 82 times.  (The word “deflation”:  twice.)  It is unfortunate that “inflation” was far and away the dominant theme on Wednesday, swamping “jobs,” “employment,” and “unemployment” which, in my opinion, should have been the focus.

Of course, no two business cycles or economic environments are exactly the same, but as I pointed out recently here, it is unlikely that we will enter a period of sustained high inflation absent a more taut labor market, and that, unfortunately, still seems a ways off.

Category: Contrary Indicators, Cycles, Data Analysis, Economy, 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.

15 Responses to “Short Memories (Fade the Inflation Hysteria, II)”

  1. Rouleur says:

    …the seeds of inflation have been planted

  2. Petey Wheatstraw says:

    With a 0% interest rate and plenty o’ QE, we can’t induce measurable inflation or a reasonable employment level? Something ain’t right in monetary theory land.

    Invictus: Krugman — love him or hate him — has written plenty about liquidity traps, which is to say the circumstances in which we currently find ourselves.

  3. It is very possible to have high inflation and a recession simultaneously…..

    The Phillips curve was disproved with the advent of stagflation in the US in the 1970s (and other latin american economies in the 1980s).

    The real problem is that there is little vestigial memory in the US of inflation combined with recession……(recall that they took inflation chapters out of university economics textbooks in the late 1990s….

    The fact that the Fed appears to be subscribing to this empirically disproven theory is amusing but tragic – place your bets accordingly and DO NOT INVEST FOR NOMINAL RETURNS!

    http://www.investopedia.com/articles/economics/08/phillips-curve.asp

  4. freemarketeer says:

    Uh, I’m still quite worried about inflation. The fact that we’ve experienced a price shock within the last 3 years means headline risk is less, as consumers have reset their comparison points to higher numbers, but that doesn’t change the fact that food and energy costs more now. There is supposedly a 6 month lag between prices breaching the demand destruction threshold and a recession, so if $100/bbl oil is the mark, then we’re looking at a downturn in August.

    Maybe I need help putting the pieces together. Available credit to consumers is down in terms of revolvers and HELOC, so absolute purchasing power is less. I’m not sure what is going on in the supply chains. Corporate margins are way up, but significant costs have been taken out. I’m assuming raw material costs have come down, but not as much as should happen theoretically, and fixed costs are providing the leverage. A good read on why I’m making this assumption (besides my own anecdotal evidence): http://jalopnik.com/#!5795871/why-gas-prices-go-up-much-faster-than-they-go-down

    Is there a way to boost employment without causing more inflation? Maybe speculative pressure on commodities falls off post QE2, but ignoring that, what happens?

  5. b_thunder says:

    Invictus writes:

    “Fast forward one year:
    Headline CPI was -1.2 percent…. The Fed funds rate had been lowered to its current range of 0.00 – 0.25 percent. Brent crude was $69/barrel. ”

    - that’s ’cause by then oil has already DOUBLED (from the low of just over 30 bucks ) in like 2-3(!!!) months thanks to QE1. Of course the Fed was less worried about deflation once they saw that.

  6. KJ Foehr says:

    “Of course, no two business cycles or economic environments are exactly the same, but as I pointed out recently here, it is unlikely that we will enter a period of sustained high inflation absent a more taut labor market, and that, unfortunately, still seems a ways off.”

    Yes.

    Ben is talking about inflation more now, because everyone else is talking about it now. But I think he knows deflation is still the real enemy.

    Inflation remains more of a hope than a fear — a hope that it continues to keep deflation at bay and reduces our collective debt burden, longer-term.

  7. Robespierre says:

    @Invictus

    “it is unlikely that we will enter a period of sustained high inflation absent a more taut labor market, and that, unfortunately, still seems a ways off.”

    This is the second time you ignore global inflation on your analysis. There are “taut labor market” conditions in countries that make the stuff we buy. Moreover, whatever the US makes (agriculture for instance) will go to the highest bidder and with the US dollar dropping against other currencies what will keep the product in the US? So my question is if global wage arbitrage gave us lower overall cost why do you ignore now that it is going in the other direction?

  8. Jim Bradley says:

    BR – (1)A lot of non-productive industry was bailed out (2) we have higher nominal purchasing power (3) at the same time we have supply shortages from lack of past good investment. Unemployment is not enough to offset this effect because there were bailouts (and gov spending) that sustained nominal purchasing power. Nominal purchasing power should have fallen in line with the discovery of non-productive activity. I.e. financial assets should have shrunk as much as the real assets to make up for the lack of production until displaced workers are again productive.

  9. Jim Bradley says:

    BR – I should add, I posted this because inflation (logically and empirically) does occur with very high unemployment …

  10. rktbrkr says:

    Just heed Ben’s words, inflation and unemployment are transitory, they’re not herpes.

  11. advocatusdiaboli says:

    So BR, is labor demand the only positive input to your inflation model? I understand why but maybe it’s less valid now? While it’s been a big component in the past when we had a non-global domestic consumer driven economy, maybe things have changed? Corporate profitability is way up but unemployment is still high—shouldn’t that be a clue that labor costs and employment are not a big a factor as they used to be? Can other previously minor factors superimpose to create a significant inflationary trend? What about currency devaluation? Also essential goods and services seem fairly disconnected to labor rates: gasoline, healthcare, food and can inflate independently as proven over the last year—so couldn’t they be big factors in non-labor-driven inflation? While convenient and simplifying to ignore food, energy and healthcare inflation because they complicate the model, is it valid to ignore them for convenience? Many took out housing from inflation last decade and it simplified the model but many missed the bubble because of it. Are you falling into the same trap?

  12. machinehead says:

    ‘It is unlikely that we will enter a period of sustained high inflation absent a more taut labor market.’

    The labor market wasn’t tight in 1974, when inflation and oil prices were soaring. Inflation ultimately is a monetary phenomenon, as the Bernank is proving once again.

    Of course the qualifier ‘sustained’ provides some wiggle room. ;-)

  13. rip says:

    @Invictus: I always enjoyed your thoughtful comments, but this one is a ….

    I guess you must live and work in NYC not the real world. And understand fully that WS bonuses are going to once again validate the Phillips curve.

    Lots of luck with that.

    Bookmark this one as a sign of your intelligence. And check back on it on six months or a year.

    Perhaps you are more insightful than me, but I see this as just another pump and dump.

    Things may indeed become more sane, but only after several trillion have been pumped out of the little guys.

    Your response?

    Invictus: I posted a chart in my first Fade the Inflation Hysteria post that demonstrated a +0.88 correlation between unit labor costs and headline CPI inflation — a much higher correlation than either food or energy. That’s just a fact.

    I agree with David Rosenberg, who wrote recently:

    Commodities by themselves cannot sustain a cycle of inflation. It needs support from other sources, as was the case from 1968 to 1982 with dramatic expansion in the baby boomer balance sheet and the surge in unit labour costs as productivity stagnated and wages were protected by cost-of-living adjustments that powerful unions at the time secured for their widespread membership.

    I think we could agree that union membership is way down — they’ve been essentially neutered — and that we live in a very un-COLA world. So where is the wage component going to come from? I could go on, but I’m contemplating a much more comprehensive post on the issue.

  14. VennData says:

    “…but only after several trillion have been pumped out of the little guys…”

    The pumpers are the retail gold hucksters and the dumpsters … you saw them unload their SLV today.

    The good news is that some people who’ve been suckered by the precious metal marketing machine will learn their lesson this time. The ‘little guys” do it to themselves by listening to the marketing machines and ‘feeling” that those shills are “right.”

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