Really Looking for Inflation, Part 1

By Jeffrey Snider

Most people have been looking at Jerome Powell’s Chairmanship of the Federal Reserve as continuity, a comprehensive extension of Janet Yellen’s (and therefore Bernanke’s). This would by nature include all the nasty habits Chairman Yellen had picked up during her one term. At the top of that list is the word “transitory”, particularly how it came to be used during her tenure in a manner wholly inconsistent with its meaning.

This expression she applied mostly to inflation, or as if somehow a valid excuse for the central bank missing its inflation target (mandate) for the last half of Bernanke’s second term as well as the entirety of her own. Six years cannot fall inside the definition of transitory. But when you have no other alternate theory?

At his Humphrey-Hawkins mandated testimony last month, Jerome Powell briefly mentioned the other undershoot. This one happens to be the very factor that policymakers are counting on for transitory to end. Alongside a great many economic problems, worker wage rates have remained stagnant in nominal terms, and atrocious in real terms even with low calculated inflation.

Powell, however, is upbeat (when is he not?) Wages, he told Congress, “should increase at a faster pace as well,” for one because inflation has been “as likely reflecting transitory influences that we do not expect will repeat.’’ Weak wages are transitory, too?

Continue reading Really Looking for Inflation, Part 1

The Fed’s Accidental Preoccupation with Housing

By Michael Ashton

I get asked frequently about Core PCE inflation. Because the Fed obsesses over Core PCE, as opposed to one of the many flavors of CPI (core, median, trimmed-mean, sticky-price), investors therefore obsess over it as well.

My usual response is that I don’t pay much attention to Core PCE, for several reasons. First, there are no market instruments that are remotely tied to PCE, so you can’t trade it (and, for the conspiracy-minded among you, that means there is no instrument whose market price can call shenanigans if the government figure is ‘massaged’). Second, while PCE is interesting and useful for some uses – it measures prices from a different perspective, mainly from the supplier-side of the equation so that, for example, it captures what Medicare pays for care as opposed to just what consumers pay – those aren’t my uses. Markets respond to inflation, and to perceptions of inflation, but what the government pays for healthcare isn’t something we perceive directly.

So, I care about PCE more than, say, PPI, but only just. The only reason I care about PCE is that the Fed cares about it.

Now,  PCE differs from CPI in a couple of key ways – apart from the philosophical way mentioned above, that one measures the price of things businesses sell and one measures the price of things people buy. But those key ways are mostly interesting to pointy-head economists who are interested in calculating the third decimal point. Me, I’m just trying to get “higher” or “lower” correct. (Ironically, those folks who are interested in the third decimal point are the same folks who miss the big figure in front). So they wail at the following chart (source: Bloomberg), and moan about how the Fed has been unable to get inflation higher because of this persistent shortfall of PCE compared to CPI. Try harder!

Continue reading The Fed’s Accidental Preoccupation with Housing

Inflation is Not Under Control

By Keith Weiner

Let’s continue on our topic of capital consumption. It’s an important area of study, as our system of central bank socialism imposes many incentives to consume and destroy capital. As capital is the leverage that increases the productivity of human effort, it is vital that we understand what’s happening. We do not work harder today, than they worked 200 years ago, or in the ancient world. Yet we produce so much more, that obesity is a disease more of the poor than the rich. Destruction of capital will cause us to produce less, and that will mean reverting to a lower quality of life.

Keeping up with Inflation

Let’s start off by addressing how not to look at this destruction. There is a facile belief offered by both Fed propagandists and Fed critics alike. It goes like this. Increased quantity of dollars causes increased prices. Therefore it’s like a tax. And the way to measure your wealth is divide the liquidation value of your portfolio by the consumer price index. This tells you if your stocks, bonds, real estate, and the family farm could trade for more groceries and cars this year. Or less. In this view, you are hoping that somehow your assets keep up with inflation.

We insert the word somehow, because it is a kind of magical thinking. Everyone knows that a central bank cannot print wealth. If it could, Zimbabwe would be the richest country. Yet, if asset prices go up due to central bank policies, most asset owners feel richer. At least if consumer prices do not go up proportionally. One corollary of the fallacy of the Quantity Theory of Money is the fallacy of using consumer prices as the measure of economic value.

Why do we say this is not the method of looking at capital destruction? It’s because over the last 10 years, the Fed and other central banks have overstimulated capital destruction. And yet the above metric of the purchasing power of your estate has gone up. Everyone (at least those who own substantial assets) feels richer, despite economy-wide impoverishment.

If you were a doctor, and your deathly ill patient had a body temperature of 98.6F (37C), you would have to find another measurement tool. Clearly not all diseases cause a fever. Well, monetary doctors need to look past consumer price indices, inflation so called, and purchasing power of your assets.

Our first observation is that the purpose of a capital asset is not for spending. The prudent investor does not think about spending his savings, or selling the family farm. He says “I cannot afford that $300,000 Ferrari” if he has only a million or two in the bank.

Continue reading Inflation is Not Under Control

Mirage? Inflation Still MIA as Number of Options Betting on Rise in Short Volatility ETF Surges

By Anthony B. Sanders

Like a mirage in the desert sand, inflation is still missing in action (MIA).

Core Personal Consumption Expenditures (PCE) growth YoY remains at 1.5% for January. The PCE deflator YoY remained the same at 1.7%.


But the number of options betting on a rise in short-volatility ETF is surging.


Yes, inflation is still a mirage (at least to The Fed). That should put a lid on further rate hike/unwinding activity. Or not!


John Mauldin and Long Soapy Showers

By Michael Ashton

[biiwii comment: trying to ignore the imagery conjured up by the title, Mike… :-( ]

I feel like I am falling behind in my articles and commenting on other articles that people have recently written about inflation. After years – literally, years – in which almost no one wrote anything about inflation, suddenly everyone wants to opine on the new shiny object they just found. At the same time, interest in the solutions that we offer – investment strategies, consulting, bespoke inflation hedges, etc – has abruptly picked up, so it feels like the demand for these articles is rising at the same time that my time to write them is shrinking…

But I try.

I want to quickly respond to an article that came out over the weekend, by widely-read author John Mauldin. I’ve corresponded over the years from time to time about inflation, especially when he got way out on the crazy-person “CPI is made up” conspiracy theory limb. To be fair, I think he considers me the crazy person, which is why he’s never referred to me as the inflation expert in his articles. C’est la vie.

Continue reading John Mauldin and Long Soapy Showers

Inflation Surge

By Callum Thomas

This week the “Chart of the Week” is a rather peculiar indicator on inflation.  The global inflation outlook has been gaining considerable interest as the global synchronized economic upturn gathers pace and central banks start to think about normalizing policy.  Clearly some (e.g. the Fed) are more advanced on this than others (e.g. the BOJ and ECB).  Inflation has become the baby elephant in the room while the big elephant in the room is still the global turning of the tides in monetary policy.

Anyway, on to the chart (which featured in a discussion on the outlook for the US Dollar Index).  The dark blue line is a composite of terms from Google Search Trends designed to capture search interest in inflation (e.g. terms  such as “higher inflation”, “why are prices so high”, “prices going up”, “inflation protected”, etc).  The main point is that there seems to be a surge in interest in inflation, and that could be an harbinger of things to come.

Continue reading Inflation Surge

Limits on the 500-Pound Gorilla

By Michael Ashton

With interest rates flirting with 3% on the 10-year Treasury note, and the potential (and eventuality) that they will go significantly higher, I thought it might be timely to review a blog post from February 10, 2013 called “Limits on the 500-pound Gorilla.” (It’s worth reading that original post for some of the comments attached thereto.)

Well, here’s an interesting little tidbit. (But first, a note from our sponsors: some channels didn’t pick up my article from  last Wednesday, “Fun With The CPI,” so follow that link if you’d like to read it.)

The Fed adds permanent reserves by buying securities, as we all know by now. The Open Market Desk buys securities and credits the Fed account of the selling institution. Conversely, when the Fed subtracts reserves permanently, it sells securities and debits the account of the buying institution.

Continue reading Limits on the 500-Pound Gorilla