September 28, 2023

Inflation Fallacy

Today’s Events in Historical Perspective
America’s Longest-Running Column Founded 1932
The inflation fallacy
By Douglas Cohn and Eleanor Clift         
          WASHINGTON — Ask the person on the street; ask your broker; ask your senator; ask Jerome Powell, chairman of the Federal Reserve. Ask: What is the current inflation rate? Even emphasize the word “current,” and still they will give the wrong answer: 6.5 percent.
          Ignoring the word “current” they will answer with last year’s annual inflation rate, which, in fact, is 6.5 percent. How do we know the Fed chief is getting it wrong? He has repeatedly stated that the Fed is going to continue raising the discount rate (the rate the Fed charges banks to borrow money) until the inflation rate falls back to two percent when it is already below two percent.
          The source for this revelation is the U.S. Bureau of Labor Statistics. Here are the facts:
          Inflation for the month of October was 0.4 percent or 4.8 percent on an annualized basis. For the month of November, it was 0.1 percent or 1.2 percent annualized. And for the month of December, it was a stunning -0.1 percent (yes, minus .1 percent) or -1.2 percent annualized. That is the definition of deflation, not inflation.
          Of course, annualizing one month of inflation or deflation does not mean those numbers will actually hold at those levels for a year. Month over month trends for three or so months and many other factors must be considered. But what we do know is that last year’s inflation rate is not predictive of anything. It is merely a statement of history.
          For example, the monthly inflation rate for last June was 1.3 percent which on an annual basis would equal 15.6 percent. But what does that aberration have to do with the future? All it did was skew the annual inflation rate for 2022, and why would the Fed or anyone else base future decisions upon it?
          Only the marketplace is getting it right. The Fed was raising its interest rate at .75 percent a month for four months until December when it raised it .5 percent and recently by .25 percent. Meanwhile, mortgage rates and the rates on T-bills (the rate the government pays to borrow money) were falling.
          In the end inflation is a matter of supply and demand. The Pandemic created supply chain disruptions. And with demand outpacing supply, prices went up. But the supply chain problem has abated on many if not all products, and inflation fell as a result. Take oil. West Texas Crude (the benchmark oil) was over $121 a barrel in June. Today, it is ranging between $70 and $80 a barrel. True, grocery bills remain high, but that was last year’s doing, not a factor of current inflation.
          The Fed may be justified in raising or lowering the discount rate based upon a variety of factors, but last year’s inflation rate cannot be one of them, yet it is the very factor the Fed fallaciously quotes.
          See Eleanor Clift’s latest book Selecting a President, and Douglas Cohn’s latest books The President’s First Year: The Only School for Presidents Is the Presidency and World War 4: Nine Scenarios (endorsed by seven flag officers).
          Twitter:  @douglas_cohn
          © 2023 U.S. News Syndicate, Inc.
          Distributed by U.S. News Syndicate, Inc.

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