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Sunday, June 20, 2021
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The Fed’s Inflation Gauges Distort Real Inflation

#Fed #inflation

If you are a believer in the doctrine that inflation is good, then you should be overjoyed when you receive a higher electric bill, it is included in the Fed’s housing category.” — Paul Ebeling

After a series of financial panics in the late 1800’s and early 1900’s, it was decided the US monetary system could no longer be left to the vagaries of market forces.

The Big Q: What was the political, bureaucratic and banking solution to this perceived problem?

The Big A: Central control.

The Federal Reserve Bank was legislated into existence on 23 December 1913.

The Federal Reserve Act established 3 objectives: maximizing employment, stabilizing prices, and moderating long-term interest rates.

And now 108 yrs after its creation, consumer prices are about 31X higher than what they were in Y 1913. This pattern has repeated itself across the world’s economies both established and emerging.

Prior to the creation of the Fed, the market was doing a pretty good job of stabilizing prices all by itself.

The public was duped with that old line of “trust us, we’re from Washington we know best.”

The reality has been really different.

The creation of central banks and the abolition of the gold standard handed control of the monetary system to politicians, bankers and academics, many incompetent.

Look at the US CPI chart from Y 1775 and see that after Y 1940, the central banker commitment to produce inflation made a mockery of the price stability objective. Year after year prices increased.

As the chart shows, inflation has been our constant companion for the last eight decades.

We have only ever known inflation. The central bankers have indoctrinated us into believing rising prices are good for us.

And while our incomes and assets rose faster than inflation, people never questioned the doctrine. The, including me and everyone I know, bought and borrowed into the ‘inflation is good’ doctrine.

The concept of annually indexed incomes gave rise to the term ‘bracket creep’.

Rising income levels push wage and salary earners into higher tax brackets, delivering more tax dollars to our spendthrift politicians.

Politicians want inflation, not because it is good for The People, but it is good for them and their barrels of pork.

Central bankers know who butters their bread, and they are determined to give us inflation, like it or not.

CPI and PCE are the 2 measures of Inflation and Fed policy.

The Bureau of Economic Analysis’ (BEA) Core Personal Consumption Expenditures Chain-type Price Index for December, released last Friday, shows that core inflation is below the Fed’s 2% long-term target at 1.45%. The December Core Consumer Price Index release is higher at 1.62%. The Fed is on record as using Core PCE data as its primary inflation gauge. The exclude food and energy.

In the real world, we cannot exclude food and energy from our monthly expenses. The volatility of these 2 Key expense categories, especially energy, often obscures the underlying trend according to the policy makers.

The volatile price of gasoline explains why so many people are confused by the exclusion of food and energy from core measures of inflation.

The chart of gasoline prices below is based on the latest weekly data from the Energy Information Administration.

And guess what, Mr. Biden wants to drive the price of fuel higher which will in turn drive up the price of food.

Have a healthy week, Keep the Faith!

Paul Ebeling
Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge Including Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he is the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.   

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