Inflation Expectations: The Kicker

Look, the bond yield has risen 100 basis points since October. That points to a deteriorating, not improving, inflation outlook.
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Check Your Head

JACKSON HOLE, Wyo. --

Fed

Governor

Laurence Meyer

told us all everything we need to know about Fed policy back on April 14.

If inflation does not move lower, while growth remains above trend and labor markets tighten further, it would, in my view, be appropriate to relink real federal funds rate movements back to changes in labor utilization rates. The failure to do so could run the risk of unleashing inflation pressures that would be disruptive to reverse.

Last Friday we

learned that, through March, inflation did not move lower and that growth remained above trend. This Friday we will

learn that, through April, labor markets tightened further.

So, provided that (a) you're wise enough to heed Meyer (please see a previous

column for details on the Meyer criteria) and (b) you're not dim enough to believe that

Alice "Just-Call-Me-Harriet" Rivlin

has stumbled onto the Secrets of the Economy and is revealing them primarily to people who prefer pretty pie-graph newspapers, you're not at all surprised at what's gone on in bonds lately.

But one more time: If the New Era is for real -- if it is so dominant and permanent a force that it has rewritten the laws of supply and demand; if the growth-price combo we have seen over the past few years owes much more to structural change than it does to luck -- then the core (excluding food and energy) price measures will decelerate again this year, just like they did last year.

And will they? You judge.

The

gross domestic product

(or GDP) report contains three

core

price measures (all three are shown in Appendix Table A in the

release).

The GDP price index less food and energy just posted its biggest quarterly increase (1.3%) since the second quarter of 1997. Note that this index rose 1.1% last year.

The gross domestic purchases price index less food and energy -- this is the broadest possible measure of prices paid by U.S. residents -- just posted back-to-back increases in excess of 1% for the first time since the first half of 1997. Note that this index rose 0.9% last year.

The personal consumption expenditures price index less food and energy has shown no improvement whatsoever since the third quarter of 1997. It has posted rock-steady increases ranging from 1.0% to 1.3% for seven straight quarters.

Meantime:

The NAPM price index rose 6.7 points in April; that marked its fourth straight monthly increase. It has tacked on 18.8 points since December and now stands at its highest level since December 1997. Note that the Chicago price index also now stands at its highest level since December 1997 and that the Philly Fed price index now stands at its highest level since April 1998.

The Center for International Business Cycle Research puts out something called the Leading Inflation Index. It was falling at a 2% year-on-year rate back in August 1998; it is rising at a 2% year-on-year rate now. This index increased more between October of last year and March of this year than it has during any five-month period since August 1994-January 1995.

Now. Does all that sound like an improving inflation picture to you? Does it sound even like an unchanged one?

Lots of economic forecasters and analysts would have you answer Yes. Those numbers don't mean anything, they'd say; anybody can always find a statistic to support any point of view any old time. And besides, they'd counter, there exist just as many (if not more) statistics to support the notion that the inflation picture continues to improve (although they must be proprietary, because the rest of us never get to see them).

And you're free to believe those people if you like.

But do understand that they cannot explain (accept?) the fact that the yield on the bond has risen 100 basis points since October, and they're bound to look even more dumb when market rates are higher come December than they are now.

Fact vs. fiction. You choose.

Side Dish

Regular readers

know that I love televisions. I love them more than

Holly Hunter

loved the baby that

Nicholas Cage

stole for her. I love them more than

Oprah

loves (and

Barnum

loved) a sucker. I love them more than anything save two Alsatians named

Toby

and

Sable

.

And so it is with a sad and heavy heart that I report that I kicked one of them in this morning.

Set Two is dead.

I had to do it. It couldn't be helped.

Citoyen

Lahart

was the first to ring me to point out the lunacy; a flood of other calls and emails immediately followed. Yet I was already watching.

(Editor's Note: Today's Side Dish then lapsed into a rant that, aside from repeated use of the word "dumbass," amounted to the following sentiment: I don't care for the fine work of a certain economist who appeared on television Monday morning. For a full recap of that rant, click here.)

It was all just too horrorshow.

And now I beg forgiveness from my Television God.

And please send contributions for Set Two II to Mouth, P.O. Box 11546, Jackson Hole, Wyo. 83002.