Tuesday, July 14, 2015

Split Inflation: Does the Fed Care?

The news in yesterday's Wall Street Journal (p. A2) that consumers are being "pinched" by a split inflation was unsettling to say the least. On the one hand, the Federal Reserve has kept interest rates near zero because the "overall inflation rate has been well below 2 percent a year" - never mind the Fed excludes a number of items including food prices and cost of fuel.

From the time of Greenspan and Bernanke all such costs as food, housing - even exploding rent, as well as meds - have been referred to as "shelter costs" -  or  "essentially made up numbers" to quote Mr. Bernanke from a 2012 remark. Well, here's an easy question: if all those shelter costs including groceries are "made up" numbers, how about we pay the costs of them in "made up money"?

Anyway, left unsaid is that while this one form of inflation is deemed "low" another form  - based on services - has increased.  To be specific (ibid.):

"Over the 12 months ending in May while goods prices fell 0.3 percent services prices were up 12 percent."

According to the piece:

"The upward trend might signal the domestic economy has less excess capacity and labor market slack than is commonly assumed. When the economy has a lot of unused capacity, business have less ability to raise their selling prices."

This is enlightening but even moreso is the example given on the inflation split between goods and services, i.e.:

"Buy a bottle of wine and uncork it at home and you are paying less than you did five years ago, according to Labor Department data. If the same wine is served by a sommelier at a restaurant you will shell out 12 percent more."

Another example, while the price of a new TV has fallen 58 percent from five years ago. the cable service (or satellite service) to deliver it has increased by 13. 7 percent.

So why do we feel we are getting the 'thick end of the stick' overall as far as prices? Well, because we "pay service bills more often than we buy most goods other than food and gasoline" (Which are left out of Fed inflation indices anyway).

Is the Fed paying attention? Hardly. According to the minutes of the Fed's June policy meeting because of "slack in the labor and resource markets" inflation will continue to run low until the end of 2017 - which means there is little incentive to raise interest rates. In fact, the dollar's increasing strength against other currencies like the euro has given the Fed yet another reason to keep them near zero.

Is this wise? I don't believe so and neither does the author of the WSJ article who notes the "economy might have less unused domestic capacity than the Fed thinks."

It warns:

"If so policy makers may find themselves in an inflation bind in the next two years."

But that may well be the least of our worries. More vexing is the asset bubble being inflated because of Yellen and the Fed's cheap money policies. Originally, I was foursquare for Janet Yellen's ascension to Fed Chairman, but sadly it appears she's merely continued Bernanke's blinkered QE strategy,  under the delusion that feeding Wall Street cheap money 'crack' helps the whole economy. NO it does not, it only aids and abets Wall Street and the speculator economy.

 George P. Brockway, author of  The End of Economic Man’‘ has written that any given Bull market's purpose is to suck the savings and nest eggs from the ordinary investor and transfer it into the hands of the richest speculators who know the small fry will never be able to resist rapidly rising share prices.  The longer the Fed feeds the stock market to the exclusion of helping income-based people the closer we come to yet another re-enactment of the collapsing Bull.  The collapse will be even worse next time around because of the extent to which income inequality has increased since 2008.  And those whose 401ks are savaged will have even less time to recover, say from a 50% meltdown, and likely have to work past 80.

For those of us who are traditional savers, still waiting for higher interest rates, we're not going to 'hold our breath' nor will we chase yield in a risky stock market. Let others celebrate as the DOW climbs toward 18,000 - we will recall what transpired in 2008.

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