Unhinged And Unrepentant – The Central Bankers’ Demolition Squad

We are still doubled over with laughter about this one, hoping we can regain enough composure to keep typing. Thus spake Charles L. Evans, one of the most economically illiterate fools ever to serve on the Federal Reserve:

“The first order thing for policy right now is to get inflation up to our objective,” Evans said at a financial literacy event in Green Bay, Wisconsin. 

Yes, we know that the Fed heads are obsessed with hitting the 2.00% inflation mark as if it were some kind of religious totem, but must they insult the common folk at a “financial literacy event” in Green Bay with the risible proposition that we don’t have enough inflation?

Even when you allow for all the manipulations of the CPI such as the geometric mean adjustment and hedonics, the chart below shows what “insufficient inflation” looks like since the year 2000. And that’s after you have paid double the price for a new auto that the BLS says has not increased in price for 17 years; substituted more hamburger for steak, and gotten squeezed into an ever-shrinking airline coach seats that the BLS says have gone down in price!

In fact, the BLS’ sawed-off price ruler known as the CPI was up 2.2% on a Y/Y basis in September. Not only is that in excess of the magic Fed target, but it’s not a one-off monthly aberration, either. Since the year 2000, the compound annual increase in the CPI has been 2.1% (red line below).

How in the world is that insufficient inflation? A buck you saved in honor of the millennium is now worth just 70 cents.

And that’s assuming that you are not in the lower half of the income distribution where necessities take up a larger share of budgets than their weightings in the CPI. Thus, over the last 17-years, housing rents are up 3.1% per year (purple line), gasoline prices have risen 3.5% annually (brown line), medical care is higher by 3.8% per annum ( dark blue line) and education prices have risen by 5.0% each year (light blue line).

So, yes, Charles, we got no shortage of inflation. Well, except for the green line in the chart below, which says that “inflation” has averaged only 1.8% per year since the turn of the century when the Fed went into money printing on a big time basis. That is, its balance sheet went from $500 billion then to $4.4 trillion now, thereby rising at a 13.7% CAGR.

It put’s you in mind of Ronald Reagan’s great story about the birthday boy who was delighted to be shown into a room full of manure. “There has to be a pony in there somewhere”, the Gipper always gamely rejoined.

But don’t even give Evans credit for finding the shortest inflation yardstick in the room. The Fed’s favorite measuring rod—-the personal consumption expenditure deflator—-is not a proper cost of living index at all; it’s a chain-price deflator, not a fixed price index.

Accordingly, if society is getting poorer because people are eating more chicken and less steak, inflation goes down! And if society is getting richer due to technological change, inflation goes down, too!