The Fed's Miserable Inflation Targeting Performance in Pictures
- Since the start of this series in 1960, the Fed hit the range 1.75% to 2.25% only 18.47% of the time, 128 months out of 693 months.
- For 331 consecutive months, from July of 1966 through December of 1993, core PCE was above 2.25%.
- The last time the core PCE topped 2.0% was January through April of 2012.
- In only 4 months out of the last 108 months, from September of 2008 to present, did core PCE exceed 2.0%.
Low inflation has been the Fed's primary concern for a decade. Their fear is people will stop buying things.
Economic Challenge to Keynesians
Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.
Reality Check Questions
- If price of food drops will people stop eating?
- If the price of gasoline drops will people stop driving?
- If price of airline tickets drop will people stop flying?
- If your coat is worn out, are you inclined to wait another year if you expect a bigger discount a year from now?
- Will people delay medical procedures in expectation of falling prices?
If falling prices stop people from buying things, how are any computers, flat screen TVs, monitors, etc., ever sold, in light of the fact that quality improves and prices decline every year?
My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.
The BIS did a study and found routine deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.
It’s asset bubble deflation that is damaging.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?
Meanwhile economically illiterate writers bemoan deflation, as do most economists and central banks. The final irony in this ridiculous mix is central bank policies stimulate massive wealth inequality fueled by soaring stock prices.
Danger Charlatans at Work
The Fed wants to hit the "natural" rate of inflation but they do not even know what it is. For discussion please see Down the Rabbit Hole: SF Fed President John Williams Seeks “Direct Attack” on Low Inflation
In their nonsensical battle against routine price inflation, the Fed, the ECb, and the Bank of Japan (central banks in general) have all collaborated to build the biggest global asset bubble in history.
When that bubble bursts, debt deflation will smack them in the face like a tomato flying at 500 miles per hour.
I expect another round of price deflation will accompany the asset bubble bust.
What the central bankers do then remains to be seen, but history suggests they will keep doubling down as they did when Long term Capital Management blew up, when the dotcom bubble blew up, and when the housing bubble blew up.
But this time the central banks will be starting with negative interest rates in Japan and Europe,low interest rates in the US, and imploding junk bond bubbles everywhere.
Meanwhile, It's Transitory
Janet Yellen tells us low inflation is "transitory".
In the real world, if the Fed had any clues, they would spot plenty of inflation in the asset bubbles they have blown.
Mike "Mish" Shedlock