Monday, April 23, 2012

Modern Inflation

Click to enlarge.

April 16, 2012
Fed’s Bullard tells Utah State crowd 2 percent inflation target is paying off in growth

Bullard said the committee’s January 2012 choice to publicize a target inflation of 2 percent was an important step toward maximizing employment and stabilizing prices to allow Americans to enjoy a comfortable balance between having enough money and the leisure time enjoy it.

The chart does make one wonder if the previous inflation target was 2.5%. In any event, I'm in favor of the 2% inflation target. It won't miraculously generate more prosperity for us, but as a saver it is better than a sharp kick in the teeth.

See Also:
MaxedOutMama: Who Wears Short-Shorts?

Source Data:
St. Louis Fed: CPI


Mr Slippery said...

Wow, a 2% inflation target while the FDIC has the savings rate capped at 0.85%.

That sure sounds like a comfortable balance between having enough money and the leisure time [to] enjoy it.

If I understand the reasoning, if the government forces you to lose purchasing power each year on savings, you will invest it in the stock market, which only goes up, thereby providing enough money and the leisure time to enjoy it. Makes sense to me.

Stagflationary Mark said...

Nobody forced investors to pile into short-term treasuries.

The yield curve is VERY steep and yet VERY FEW investors are willing to go long (for fear of interest rates rising and/or inflation heading to the stratosphere).

Whether they are/were wise to avoid going long will be left for hindsight to determine.

Credit Bubble Stocks: Only 2% Bullish on Treasuries in Barron's Poll

Wow. Amazingly, long term interest rates probably haven't bottomed yet.

As you know, I really went long last year when I converted my entire IRA into one 29 year TIPS bond. Meanwhile, Jeremy Siegel was warning people NOT to do it. In hindsight, it was his worst advice ever and basically said so at the time.

Stagflationary Mark said...

One more thought.

If the Fed set the target at 0% inflation then there would be a great meany people hoarding cash.

And what would happen if everyone hoarded cash? Self-fulfilling prophecy!

1. People hoard cash because they fear the economy.
2. The economy falls apart so people hoard cash.

It's a chicken and the nest egg problem. Sigh.

Stagflationary Mark said...

Yet another thought.

Let's say the Fed was unofficially targeting 2.5% and is now targeting 2.0%.

What if 10 years from now the Fed is targeting 1.0% and we're all forced to learn Japanese to fit in, lol.

Sigh. Gallows humor.

Mr Slippery said...

If the Fed set the target at 0% inflation then there would be a great meany people hoarding cash.

Look at M1 velocity. The Fed is targeting 2%, it achieving 2.5% and people are still hoarding cash.

If the Fed really wanted to get money moving, they would target 8% and achieve 10%, but they don't. Why not?

Is it because the people that count, the people with a lot of debt assets would rather have a 20+ year Japan style depression than a few years of harsh inflation that wiped out a lot of the real value of the debt assets they hold? Something to ponder.

Troy said...

I'm not a fan of Krugman's "let's inflate our way out of this" policy recommendation.

those with pricing power in this economy will continue to use it if/when inflation hits.

these tend to be the people who are already winning, so inflation will just exacerbate the dysfunctionality of our economy.

I also think falling wages (as % of income) and rising trade deficit has a lot to do with falling velocity, though that's just a guess.

Stagflationary Mark said...

Mr Slippery & Troy,

If the Fed really wanted to get money moving, they would target 8% and achieve 10%, but they don't. Why not?

While I think your reason rings true I also believe that nobody would actually believe that an 8% inflation target would end there, the hyperinflationists would be screaming their gospel on the streets in a most believable fashion, anyone with two cents (of reasoning) would be hoarding physical goods in a most unproductive way (the wealthiest first as Troy points out, with those living paycheck to paycheck being last), consumers would be scared to the point that most discretionary spending would cease, unemployment would rise as a consequence, and the game of can kicking would therefore come to an end? It has crisis written all over it.

So let me whisper a dirty little truth. When we have an egg shell of an economy perhaps it is best to tread very carefully and very predictably.

BOO! *crash*

That last part was just me being mean, lol. Sigh.

I too do not believe we can inflate our way out of this. Every balloon we have tried has popped.

Scott said...

If CPI is running above the inflation target, why doesn't the Fed raise rates? Actual above target calls for tightening policy, per the orthodoxy.

Stagflationary Mark said...


There's a lot of volatility in the CPI. In my opinion, the Fed's hitting the target fairly well.

CPI Monthly Changes

Just below 0.2%, on average, would hit the target.

Stagflationary Mark said...

As seen in the chart, headline year over year inflation will probably fall a bit in the next two months as last year's higher inflation months are replaced.

It's not a given but I think it would be a reasonable guess.

Stagflationary Mark said...

Also note that 3 of the last 6 months were above target and 3 were below target.

Stagflationary Mark said...

I would also add that when the Fed blows it they aren't going to undo the damage.

If the Fed mistakenly allows the CPI to grow at something other than 2% for a year then they won't change the new target for a year to compensate. What's done is done.

One would hope that the errors therefore don't have an inflationary or deflationary bias. They probably will though depending on the ratio of hawks to doves.