Another Inflation Scare

The press are ginning up a panic about inflation, hoping to hang Biden's economic disaster around Trump's neck.

Price inflation is a big story once again, with recent reported increases in the Consumer Price Index and Producer Price Index putting investors, policymakers, and journalists on edge, especially with the Federal Reserve showing a reluctance to reduce interest rates further, which would stimulate the economy. The Fed believes that economic strength causes inflation. That is wrong, but there’s nothing we can do to puncture the Fed’s illusion.

Analysts will carefully parse the the Fed’s statements for hints as to whether the central bank is going to make fewer interest rate reductions this year than was suggested last year. One thing is clear: the Fed is becoming increasingly wary about expanding the money supply.

If you accept the central bank’s preferred measures, there can be little doubt that the central bank has yet to tame inflation. The Epoch Times reports:

According to the Bureau of Labor Statistics, the annual inflation rate was 3 percent in January and surged by a hotter-than-expected 0.5 percent month over month. This represented the fourth straight increase in the annual rate, which is now at its highest level since June.

Core inflation, a measure that removes the volatile energy and food components, ticked up to a higher-than-forecast 3.3 percent. The core CPI also rose by 0.4 percent monthly, slightly above the consensus estimate of 0.3 percent.

“January was hot, hot, hot—for inflation,” said Mark Hamrick, senior economic analyst at Bankrate. “This marks backtracking for the journey toward lower prices and price stability.”

Prices of some goods important to consumers rose very rapidly, the story notes: “Food prices surged 0.4 percent and climbed to 2.5 percent in the 12 months ending January. Supermarket costs also jumped 0.5 percent from December to January.”

Although these price increases are tough on consumers, and we certainly don’t like them, they do not necessarily indicate a decrease in the value of the dollar, meaning inflation. Prices of individual goods always fluctuate, and consumers adjust their purchases when that happens, buying less of the newly more-costly items and more of better-value ones. That is little consolation when people find they must cut back on eggs, gasoline, and other important things, but it is not a reason for the Federal Reserve to strangle the money supply.

The price of eggs has risen because of factors other than the money supply, the Epoch Times (ET) story reports:

The most notable jump in the food index was the price of eggs, which climbed 15.2 percent over the month.

“This was the largest increase in the eggs index since June 2015 and it accounted for about two thirds of the total monthly food at home increase,” the Bureau of Labor Statistics said.

The average price for grade A large eggs is at an all-time high of $4.95, fueled by the devastating and ongoing bird flu outbreak that has destroyed supplies. Additionally, farmers have endured elevated energy, feed, and labor costs, adding to higher input price pressures.

Note that the supply-chain problems are old news, not new effects caused by overall price inflation in the present. The ET story continues:

“Millions of egg-laying hens were culled to prevent the spread of the virus, drastically reducing the supply of eggs in recent months,” LPL Financial’s chief economist Jeffrey Roach said in a note to The Epoch Times.

“This reduction in supply, coupled with ongoing supply chain disruptions and increased production costs, has led to the historic increase in egg prices.”

The same is true of gasoline, the story notes:

Gas prices have risen ahead of the spring’s annual maintenance work at refineries. Due to various outages, the work is expected to accelerate on the West Coast this year.

“Refinery issues are creating localized disruptions, particularly on the West Coast, where a refinery fire and the transition to summer gasoline are pushing prices higher,” Patrick De Haan, head of petroleum analysis at GasBuddy, said in a note.

Overall, much of the nation is witnessing stable gas prices, he noted.

That other big bogeyman, tariffs, likewise has no effect on the general price level, though Fed Chairman Jerome Powell suggests they will cause problems for the central bank anyway:

While potential tariff effects will not appear in the economic data for some time, the Fed is closely watching Trump administration policies to determine what necessary actions, if any, are needed.

“The underlying economy is very strong, but there’s some uncertainty out there about new policies,” Powell said. “We’re just going to have to wait and see what the effects of those policies are before we think about what we can do.”

He said that tariffs could cause the economy to evolve in different ways but that the Fed will not know until the policies are fully implemented.

Other Fed governors seem to think likewise:

A chorus of Fed officials, including Chicago Fed President Austan Goolsbee, has expressed concern that tariffs could cloud inflation data, making it harder to craft monetary policy.

What Powell really seems to mean is that tariffs could affect economic growth, which the Fed thinks affects inflation. That’s wrong, as I noted above, but it does not make the obvious mistake of overlooking the fact that the substitution effect means that tariffs change the choices producers and consumers make but cannot raise the overall price level. Not everybody understands that, as the ET story indicates:

A recent S&P Global forecast suggests that tariffs could cause a one-time price increase of between 0.5 percent and 0.7 percent. Boston Fed researchers project that tariffs on Canada, Mexico, and China could raise core inflation by as much as 0.8 percentage points.

That is simply wrong.

All this worry about inflation is overwrought. I mentioned above the Fed’s “preferred measures” of inflation. Writing at X, economist Alan Reynolds of the Cato Institute notes that those measures are flawed:

Monthly changes in the 12-month year-to-year average CPI tell us little because they are dominated by the previous 11 months. They are also still dominated by lagged BLS estimates of rent and Owner’s Equivalent Rent (called ‘shelter’) because those 12-month averages are doubly dominated by antiquated information.

Th[e] green line in this graph shows the EU-style “Harmonized” CPI for the U.S. The harmonized index excludes (as other countries do) the uniquely dubious American estimates of “Owner's Equivalent Rent” (OER).

Harmonized inflation is remarkably like the CPI less shelter, which also excludes rent. So, we can safely conclude that—aside from OER—the 12-month rate of harmonized CPI inflation in the USA was zero or negative right after the recessions of 2001, 2009 and 2000.

Here is the chart Reynolds mentions:

Given these deviations from reality, the CPI “should now be ridiculed and shunned because lagged shelter estimates are over 45% of Core CPI,” Reynolds writes.

Although inflation has risen a little in the past couple of months, it is not on an even remotely frightening course at present.