There is No Bang for the PCE Buck

Mish

The gap between PCE and Real PCE keeps growing as a direct result of inflation.

PCE Gap

A plot of PCE vs Real PCE shows the impact of inflation over time. 

I picked 2012 because that is the year the BEA indexes 2012 at 100. 

PCE Deflator vs Fed Target

PCE Deflator vs Target June 2020

PCE vs Real PCE Spread

  • August 2012: -7.6 Billion
  • June 2020: -1,333.7 Billion

Between 2012 and June of 2020, inflation took $1.33 Trillion from reported nominal spending.

This is despite the fact that the Fed is struggling to reach its inflation target. 

Fed's Inflation Target

The Fed's inflation target is 2.0%. Some Fed presidents want the Fed to overshoot to make up for missing its previous targets.

The Fed wants your dollar to buy less and less (and it does) as the chart shows. But the Fed is not satisfied with that robbery. It wants even more. 

Note that it's Real PCE, not PCE that adds to GDP.

The lead chart would be an even bigger disaster if the Fed actually managed to hit its target.

The Core CPI Declines 3 Months for the First Time Ever

CPI and Core CPI Year-Over-Year For June 2020

On June 10, I noted The Core CPI Declines 3 Months for the First Time Ever

Poor Measure of Inflation

These indexes supposedly measure inflation.

They do nothing of the kind. The indexes do not include home prices, only rent.

The purported medical inflation is a joke. Anyone who buys their own medical insurance will tell you their costs are up more than the reported 5.9%.

Anyone in college has not been pleased with the rising cost of tuition and rent in college towns.

And anyone with an ounce of common sense knows the current stock market bubble is a measure of inflation.

Lie of the Day, Month, and Year

The Fed and economists pretend that "inflation" is only up 0.1% year-over-year.

The Fed and economists in general do not know how to measure "inflation".

And the Fed's efforts to produce it has created destructive bubbles sure to pop causing the deflation they hope to prevent.

No Economic Benefit to Inflation

My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

There is no economic benefit to inflation but there are winners and losers. The winners are those with first access to money, namely the banks and the already wealthy.

The Fed complains about income and wealth inequality but they are the primary source.

BIS Deflation Study

The BIS did a historical study and found routine price 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 study.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations

Asset Bubble Deflation

It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.

Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive build up of unproductive debt and asset bubbles that eventually collapse.

The Problem is Not Deflation, It's Attempts to Prevent It

For discussion of these ideas, please see The Problem is Not Deflation, It's Attempts to Prevent It.

Consumer Spending Jumps for a Second Month ... But

For additional comments on PCE and the economic dilemma of the Fed and Congress, please see Consumer Spending Jumps for a Second Month ... But

Deflationary Bust Coming

Meanwhile, there is no bang for the CPI buck and the Fed wants even more pain for consumers. Asset bubble are the result. 

The Fed can print money but it cannot dictate where it goes. Since 2000 the Fed has sponsored three major bubbles: The DotCom bubble, the Housing Bubble, and the bubble we are clearly in now, widely known as the "everything bubble". 

But bubbles always end the same way: with deflationary busts. That is why the long bond yield is a mere 1.2%.

Mish

Comments (30)
No. 1-5
anoop
anoop

how long before apple is a $10t company?

Tony Bennett
Tony Bennett

"Deflationary Bust Coming"

...

Yes.

Credit tightening. One example - per Lending Tree - 70 million credit card users have had limit lowered or account terminated since May.

truthseeker
truthseeker

Hey Mish I have some important things to say here, but since I’m having had such a great week in the markets this past week, everything is sunshine and lollipops helped along by the afternoon happy hour as you know even though we are loosing our country as even my oldest 2 grandsons sadly understand.

Maximus_Minimus
Maximus_Minimus

Off topic question, but does anybody know a joke about a lawyer, a journalist, and an economist involving a car?

Amanacer
Amanacer

Can the farmers keep feeding us? Will the food chain hold?


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