Murder by Numbers
JACKSON HOLE, Wyo. --
mentioned inflation expectations thrice in his
Although the FOMC kept the nominal federal funds rate unchanged between March and July 1998, it allowed the real funds rate to rise with continuing declines in inflation and, presumably, inflation expectations.
Among the temporary factors holding down prices, the sizable declines in the prices of oil, other internationally traded commodities, and other imports contributed directly to holding down inflation last year, and also indirectly by reducing inflation expectations.
Given the loss of pricing power on the part of businesses, it is not surprising that individual employers resist pay increases. But why has pricing power of late been so delimited? Monetary policy certainly has played a role in constraining the rise in the general level of prices and damping inflation expectations over the 1980s and 1990s.
Damping? Surely G is too modest. Check out the table below. The numbers in it, which are available at the Philly Fed site, represent consensus forecasts for the average rate of consumer price index inflation for the 10 years following the survey date.
These numbers have been ticking down consistently for two decades -- a piano teacher couldn't ask for something more metronomic. Indeed,
himself would pull proudly on the pipe and nod knowingly at the most clear-cut case of murdered numbers (staticide?) to surface in years.
Now to the seamy side of things. What people say is one thing; what they really think is quite another. How many of you in the audience, for example, think that the inflation rate is going to average 2.30% over the next 10 years? Can we please have a show of hands? Right -- let it be entered into the record that this correspondent saw none. And it will comfort you to know that Greenspan didn't stick his arm up, either. Matter of fact, back in October, noting that the difference in yield on a vanilla 30-year Treasury bond and a TIPS issue of the same maturity implied an expected 1.2% inflation rate over the next three decades, Greenspan literally laughed.
And, dear reader, by the time your eyeballs hit these very words, your narrator will already have gotten a dozen whiny emails that accuse him of (a) failing to recognize the difference between 10 years and 30, (b) failing to recognize the difference between 2.3% and 1.2% and (c) failing to provide a proper background for this discussion by failing to mention everything from illiquidity premiums to sun spots.
Yeah, yeah, yeah. The bottom line is that Greenspan didn't raise his hand.
Keep in mind that the numbers in the table above are guesses -- merely this and nothing more. And keep in mind that the guesses pop from the mouths of economic forecasters -- the same economic forecasters who reckoned the economy would grow just 2.0% in 1997 (it ended up vaulting 3.9%) and only 2.3% in 1998 (another 3.9% surge). So, especially in light of such sorry one-year outlooks, it is nothing shy of fascinating that any market participant in his right mind would place any stock at all in what these people suppose any variable will do over the next 10 years. And, in fact, even if one of those forecasters predicts that early Thursday morning Maria will recite some flow data and predict a rally at the open, folks, you're probably wise to bet the other way -- as painfully counterintuitive as that is.
Funny thing about economists: They possess an asymmetry that not even a mother could love. The forecast for this year's inflation rate, strangely enough, never fails to fall within a tenth or two of last year's actual increase. But with growth forecasts? Forget it. On that front, any unusually big increase is slapped with an "unsustainable" label -- and predicted to reverse in short order. And this practice is so prevalent that even the
top tier partakes. Just this morning, for example,
reminded us all that current-account deficits are "unsustainable" in the "long" run. Anybody have any idea for how many years the United States has been running such a deficit? Anyone? Well, put it this way: A child born in 1983 has been suffering under the weight of one every year of his life.
Another funny thing about economists: weird titles. It's commonly accepted, for example, that Don Ratajczak of
Georgia State University
is the Best Inflation Forecaster in the country. He is to inflation forecasting what John Berry is to Fed watching -- the one guy considered deeply in-the-know, and right at the top of the table, despite the fact that even the most vocal supporter cannot supply a track record to explain why. Indeed, back in December 1996, when the inflation rate was running at 3.3%, Ratajczak was predicting that it'd still be at 3.3% a year later. What actually happened? The inflation rate fell smartly, to 1.7%. Then in December 1997, after inflation had decelerated to 1.7%, Ratajczak predicted that it would accelerate to 2.3% a year later. What actually happened? The inflation rate fell again, to 1.6%.
The press is more generous about doling out titles than Las Vegas street-corner guys are about handing out phone-sex adverts.
Ignore them (the titles, not the adverts).
The combination of ever-lower inflation expectations and backed-up yields has (all too predictably) prompted members of the moron flock to pronounce bonds a screaming buy. These people have been smacked silly -- and repeatedly so -- since they first encouraged this vogue trade last Tuesday. Stubbornly persistent? You bet. But unless there's a government bond dealer out there now paying out for perseverance instead of price moves, they're even poorer than they were a week ago.
Think back to October 1993. The yield on the bond sits at 5.78%; the inflation rate has dropped by 3.5 percentage points in three years; inflation expectations have dropped for 13 straight years. Things couldn't possibly look more favorable. So you jump into bonds.
And one year later you're standing there, in shock, wondering how in the hell yields could possibly have risen to 8.16%.
Sure, things are different now. And maybe the bond yield won't be able to get any higher than 5.75% for a long time. And maybe the market has already priced in the employment report that will hit Friday.
And maybe not.
Chain stores will report February sales results Thursday morning. Wise men and women reckon that, on a year-on-year basis,
can do 8.5%,
can do 6.5%,
can do 3.5%, and
can do 1.0% (forget about
But two things point to upside surprises. The first is that consumption in general is still rising at a pace more obscene than most care to acknowledge. The second is that, as of the week ended Feb. 27, the
sales index was rising at a 7.2% year-on-year rate; this index hasn't turned in a number that big since last August.
Oh, man! Very much liking that new
commercial. Long live sport!
. Please save a space right near you for me?