I'm So Tired of the Transitory Inflation "Debate"
Epsilon Theory
July 1, 2021·Money
The Federal Reserve is redefining inflation measurements in real time. When core inflation measures showed weakness in 2015 and 2016, they didn't celebrate median PCE as proof of control. Now that it serves their narrative, it's suddenly the "truer" picture. What they're performing isn't economics. It's the reshaping of what counts as real.
- The language used to describe inflation cannot be wrong by definition. Words like "transitory" and "tools" are articles of faith, not measurable concepts. You cannot prove them false, only reinterpret what they mean.
- The Fed shifted which inflation metrics matter only when convenient. Median PCE wasn't mentioned as significant in 2015 when it ran hot. It became important once the headline numbers embarrassed official forecasts.
- Real inflation moves as rolling waves through different categories. First oil, then food, then housing. By the time you isolate enough "outliers," the underlying pattern disappears from the official story.
- The Arthur Burns playbook is instructive. He excluded oil after 1973, then food, then used cars, then jewelry. Eventually only 35% of the CPI remained, and that portion was rising double digits.
- The institutional structure cannot lose this debate until something more powerful replaces it. Until then, they will always win by redefining what the words mean. Market participants who act as if they believe this are the ones setting prices and expectations.
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Comments
Great article. I think one of the most interesting points (which you allude to in your discussion of 2015/16 PCE) is why these debates don’t materialise when the shoe is on the other foot. In early 2020 we had just 3 months of negative mom CPI but there was no debate about whether this effect may be transitory and related to the temporary suspension of huge swathes of the economy.
“The bank is something more than men, I tell you. It’s the monster. Men made it, but they can’t control it.” ~ John Steinbeck, ‘The Grapes of Wrath’
The FED is omnipotent if you do not believe me just ask Jim Cramer.
There is a little sushi bowl place around the corner from my office I hit it once a week for lunch - my sushi bowl and a water (same exact bowl every time) $12 bucks for the last few years, last month I was taken back when it was $15 , yesterday $17 !
The Spaghetti Factory (I really need to quit eating pasta for lunch) I almost went into a carb coma Monday when I ate there. Anyway , no more lunch menu - so my $8 dollar lunch is now $15. Is the portion bigger? Maybe… its hard to tell.
Fiat news is one of my favorite notes of all time , and I think Ben is correct to adjust that to a fiat world!
I do see signs that people are realizing how much misinformation they are being fed.
I have many retail clients and the majority now openly joke with me about fiat CPI numbers - this is new.
Edit the FED is also omniscient.
That Arthur Burns was a comical genius!
That aside, thanks for introducing me to the concept of inflation being a “rolling series of shocks through one goods/service category after another.” I’ve not come across that explanation before and it completely reframes the current inflation debate for me! Thanks Ben.
This conversation has been readily occurring at my place of employment. Most indicate it is all statistical because values were suppressed in 2020. My positioning is to stop framing the argument as “either/or”. We can have a statistical anomaly due to the lower inflation levels in 2020 as we “revert”, AND we can have actual inflation in the price companies and individuals pay for the things which much be purchased. I find it usually ends with me asking a question if they think the price they pay for groceries/education/insurance/housing has only meaningfully increased in recent months and do they expect those prices to meaningfully decline in the upcoming months/year.
I appreciate much how you frame our receipt of the language from on high. I propose a simplistic language response to the tautology: PCE excludes the “volatile” components of food and energy. What else do we live on, besides food and energy?
Yr/yr oil price comps through yr end are almost triple digits. Rent comps are going to be double digit through next spring as well.
Bingo!
The Fed can do QE to any extent they deem reasonable. QE supports ALL assets - stocks, bond prices, real estate, and even collectibles like Bitcoin. However, the Fed cannot manipulate the markets forever. When the data on inflation becomes so apparent and so persistent that Powell is embarrassed into stopping QE then the bond vigilantes will have a less expensive proposition to enforce the free market price discovery of interest rates. At this point, Powell can keep the short-end at zero as long as he wants and create whatever false narrative necessary but he will be too embarrassed to do QE. So at some point, the markets - not the Fed - will run monetary policy. Until the GFC and the crossing of the Rubicon with QE, markets forced the Fed. What QE does is to suspend free markets. Congress controls the purse. QE should be removed from the Fed’s unilateral hands.
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