As I pointed out in my latest column, the politics of inflation are dominated by concerns about gasoline and food prices — precisely the prices over which policymakers in general, and the president in particular, have the least influence. Economists, by contrast, usually focus on measures that try to get at underlying inflation, excluding highly volatile stuff like, well, energy and food.
Actually, the traditional definition of “core” inflation — the one usually used by the Federal Reserve — which excludes only energy and food, has been problematic in the post-pandemic era. Why? Because we’ve been seeing some wild fluctuations in other prices, like used cars. So there’s growing emphasis on other measures of core inflation, like the Dallas Fed’s “trimmed mean” measure, which excludes extreme price movements in either direction. You can see the difference in this figure, which shows three-month rates of change in the two measures since 2020 (month to month is too noisy, whereas annual changes lag too far behind events):
Traditional core inflation has been highly variable, the alternative measure less so. Both measures, however, have eased off lately. It looks as if underlying inflation is running at something like 3.5 to 4 percent.
Easing inflation is good. But we’re still well above 2 percent inflation, which the Fed and other central banks have traditionally seen as their target. And the Fed is set to continue tightening until that target is hit.
So why is 2 percent the target? I’m not going to crusade against the 2 percent solution. But anyone interested in economic policy should know that the history of how 2 percent came to define “price stability” is peculiar, and that the argument for keeping that target is grounded less in straightforward economics than in almost metaphysical concerns about credibility.
One way to see the peculiarity of 2 percent is to take a longer view of inflation, going back to 1984, the year of “morning in America.” At the time, the United States was experiencing rapid economic growth because the Fed, which had squeezed the economy extremely hard to end double-digit inflation, had relaxed monetary policy because, in its view, inflation had been vanquished. By 1984, and for the rest of the 1980s, the Fed felt comfortable about inflation because it was running at around only 4 percent:
The point, of course, is that during Ronald Reagan’s second term, America’s underlying inflation rate was roughly what it is now. Yet policymakers were strutting around boasting about their victory over inflation, and the public didn’t see inflation as a major concern:
So how did 4 percent inflation come to be considered excessive and 2 percent acquire sacred status? It’s a long story, in which New Zealand, of all places, played a crucial role.
But the short answer is that 2 percent seemed to offer an easy answer to a dispute between economists who wanted true price stability — zero inflation — and those, including a guy named Larry Summers, who thought we needed somewhat positive inflation to preserve the Fed’s ability to fight recessions. The stable-price crowd was willing to believe that 2 percent was actually zero, because conventional inflation measures understated the benefits of technological progress. The room-to-act crowd believed that 2 percent was high enough that the Fed would rarely end up cutting interest rates all the way to zero and finding that it wasn’t enough.
As it turned out, however, this latter judgment was all wrong. The Fed and other central banks have spent much of the past 15 years with interest rates as low as they can go, desperately seeking other tools to stimulate their economies:
As a result, a number of economists have suggested that the inflation target should be raised. For example, in 2010 Olivier Blanchard, then the chief economist of the International Monetary Fund, made the case for an inflation target as high as 4 percent. I made similar arguments to the European Central Bank a bit later.
None of these arguments got much real-world traction, however, perhaps because central bankers weren’t convinced that a higher inflation target would help them very much. But right now we face a different question: How much are we prepared to pay to get back to 2 percent?
Again, if the Fed were to apply the standards that prevailed in the 1980s, it would consider the current rate of inflation acceptable and declare victory. Instead, it’s putting a squeeze on credit markets and risking at least a mild recession to get us down to 2 percent from 4 percent. Why? It’s not because there’s a compelling economic case. As Blanchard and his co-authors asked back in 2010, “Are the net costs of inflation much higher at, say, 4 percent than at 2 percent?” There’s no real evidence to that effect.
As best I can tell, the main reason Fed officials are insistent on getting back to 2 percent is concern about credibility. They fear that if they ease off at, say, 3 percent inflation, markets and the public will wonder whether they will eventually accept 4 percent, then 5 percent and so on. One reassuring aspect of the current bout of rising prices is that longer-term inflation expectations have remained “anchored,” so that there are no signs of a 1970s-type wage-price spiral. Giving up on the 2 percent target might risk losing this anchor.
Being honest, if I were a decision maker at the Fed, I would probably have the same concerns. But it seems important to realize that if we are about to have a recession, which is certainly possible, it won’t be because hard economic considerations require that we squeeze inflation all the way back down to 2 percent. What we’re seeing instead is monetary policy driven by softer, vaguer concerns about credibility. We live in peculiar times.
Krystal and Saagar look at the metrics surrounding inflation and corporate profit margins that how how approximately 60% of the surge in prices of goods is resulting from rampant price gauging
In this episode of On The Margin Mike is joined by returning guests Grant Williams & Luke Gromen. We welcome back two financial market veterans for a special episode exploring the fracturing geopolitical landscape between the east and the west. Grant and Luke share their insight surrounding China’s declaration of war on the U.S, how the current monetary system could collapse China’s economy, the consequences of globalization, what the end game is for the dollar & how to prepare for the changing world order as two global superpowers collide.
00:00 ・ introductions
00:55 ・ The great power competition: China vs U.S
08:39 ・ Is it ethical to be in business with China?
18:44 ・ The consequences of globalization
20:11 ・ A battle of ideologies between the east and the west
24:51 ・ The current structure of the monetary system
31:30 ・ Inflation is the only way out of a sovereign debt crisis
31:30 ・ Emblematic of moral decay
49:38 ・ Understanding the financial oppression
55:06 ・ Opinion on how Bitcoin plays in all this
Goldsmith warned elites about the dangers of free trade.
00:55・The great power competition: China vs U.S
08:37・The difference in financial markets between China & the U.S
18:42・The consequences of globalization
20:08・A battle of ideologies between the east and the west
24:48・The current structure of the monetary system
28:45・Coinbase Prime Ad
31:26・Inflation is the only way out of a sovereign debt crisis
36:52・The end of an empire
49:32・What assets to buy during financial repression
54:58・Grant & Luke’s framework for Bitcoin
Junk bonds are yielding less than CPI
people haven’t been making i neverthought i’d see this in my careerdaniella the other day so-called junkbonds oryield bonds we’re yielding lower thanthe cpiindex it’s just unbelievable thatsomething we used to call junk we knowright nowis going to pay us less than what thecurrent inflation rate isi just don’t conceivably can’t bringmyselfuh to look at bonds in any way shape orformand quite frankly that’s a very scarything and maybei’ll end with this part the fixed incomemarket has been destroyed by the fedand that’s the last part of my businesswe i work with a group that specializesin retirement andbusiness and exiting and estate planningthe retirement business is completelyup in the air there’s no longer any safesecureprinciple secured investment out therepeople have to now takerisk to their principal in order tomaintain some sort ofyou know financial stability retirementwhatever it may beand that’s something we never thoughtwas going to be when we startedin this business and that’s the thingthat’s not being discussed by wallstreet but willwhen eventually the market implodes andthen people realize that hey what how doi do how do i keep maintaining mylifestylebecause i can’t i can’t keep making 5 10or twenty percent like it’slike it’s simple if i may one final noteit is an extreme pleasure and honor tobe interviewed by youand your listeners aredon’t recognize how fortunate andblessed they arebut because i know when i see you doother interviews that you’re on theother side of the coin orwho you’re interviewing but you don’tattack them you give them a chance toshare their views and in a nice wayyou bring up points that kind of pointout where they may not beand i have to tell you that’s a blessingand gift and i just hope you keep itmeans a lot to me peter thank you somuch thank you for those words andagain thank you for your time come backsoon to stansberry investor.com okay
They 100% lied about the inflation numbers in May. This is insane.
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In this episode of On the Margin, Brent Johnson of Santiago Capital discusses his views on whether or not CPI inflation is transitory or here to stay. We cover Brent’s view on the most recent CPI and PCE prints, why consumer prices are ticking up, and whether or not he thinks we are headed for inflation or deflation. We also did a review of Brent’s famous “dollar milkshake theory,” the impact of fiscal and monetary stimulus on the dollar, and why he believes a strong dollar is dangerous for global markets.
00:00 ・ Introductions
02:28 ・ Are we heading into deflation or inflation?
08:30 ・ How does QE play into the mix?
16:07 ・ How does supply/demand play into the mix?
25:20 ・ How do you predict inflation?
30:14 ・ Why is the strong dollar a problem for the world?
45:28 ・ What does a strong dollar do for stocks / US equities?
53:31 ・ The dollar’s international significance
58:52 ・ How to plan for a debt crisis