{"id":49418,"date":"2022-03-15T12:59:07","date_gmt":"2022-03-15T02:59:07","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=49418"},"modified":"2022-03-15T12:59:07","modified_gmt":"2022-03-15T02:59:07","slug":"inflation-is-not-exploding-out-of-control-and-interest-rate-rises-will-not-help","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=49418","title":{"rendered":"Inflation is not exploding out of control and interest rate rises will not help"},"content":{"rendered":"

\t\t\t\tIt is hard work being an economist. Especially when about 90 per cent of what one reads each day is fiction masquerading as truth. That wouldn’t be so bad because fiction is good when it is in the right place. But in this context, the fiction that comes out from economists and their lackeys in the financial media causes massive damage to innocent citizens who lose their jobs, have their pay aspirations stifled, enter poverty, lose their homes and commit suicide out of sheer hopelessness with the situations that are forced upon them. When you dig into some of the media coverage you realise that it is really just a self-serving promotion for speculators in financial and share markets and has very little foundation in a deeper understanding of economics. This so-called Op Ed piece in The Age (March 14, 2022) – No-win situation: The Fed is paying the price for dragging its feet<\/a> – is representative of the nonsense that parades as economic commentary. It reflects a sad state of affairs.
\n<\/p>\n

The journalist has form. He regularly writes this sort of nonsense.<\/p>\n

I last commented in this blog post – Another fictional characterisation of MMT finishes in total confusion<\/a> (March , 2019) – when he decided that he was an expert on Modern Monetary Theory (MMT) but revealed he had only really read what I decided to name KLOP (Ken, Larry, Olivier and Paul) because of its rhyming qualities.<\/p>\n

You won’t become an MMT reading KLOP.<\/p>\n

But this journalist who is prominent in this newspaper, which is run by the former Australian Treasurer (Costello) and has shifted from being progressive to reactionary since Nine Entertainment took ownership.<\/p>\n

Anyway, the substantive proposition of the article is this:<\/p>\n

1. “The US Federal Reserve Board has been behind the curve for the past year as inflation rates exploded” – note use of the term “exploded”. As I see it, the US inflation rate has steadily risen in the face of historically rare supply constraints and only recently accelerated a bit in the wake of Putin’s ridiculous invasion of the Ukraine.<\/p>\n

Some of the factors that pushed the most recent rise are already receding.<\/p>\n

2. The use Federal Reserve has now decided that its previous view that “inflation would be “transitory” that it held throughout last year was misguided.”<\/p>\n

In fact, that is not what the Chairman of the US Federal Reserve, Jerome Powell has admitted.<\/p>\n

On November 30, 2021, the Chairman appeared before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate. Here is his – Coronavirus and CARES Act Statement<\/a>. The full transcript is not yet available but you can watch the proceedings – HERE<\/a>.<\/p>\n

He was asked about the use of the term ‘transitory’.<\/p>\n

He said:<\/p>\n

\nWe tend to use … [the word transitory] … to mean that it won’t leave a permanent mark in the form of higher inflation … I think it’s probably a good time to retire that word and try to explain more clearly what we mean … factors pushing inflation upward will linger well into next year.\n<\/p><\/blockquote>\n

Those factors relate to “supply chain issues” and now the Ukrainian invasion.<\/p>\n

As I have noted previously – transitory – does not necessarily have a temporal dimension to it. It just means as long as the special circumstances prevail.<\/p>\n

That is what the Federal Reserve Chairman was referring to rather than conceding that inflation was now institutionised and running out of control (‘exploding’).<\/p>\n

3. Apparently, the Federal Reserve has realised interest rates and its bond-buying program has caused the inflation.<\/p>\n

No explanation is given for how that causality occurs when it is clear that the price rises are being driven by supply side issues (workers not being able to produce things), abuse of market power and military conflict.<\/p>\n

Does anyone really believe that rising interest rates in the West will force the Chinese government to reverse its decision on its latest widescale lockdown of 24 million people in the various cities in the wake of growing Covid infections.<\/p>\n

These cities are part of the Chinese manufacturing\/assembly strength and will further disrupt supply chain flow and cause further inflationary pressures.<\/p>\n

What would a rise in US interest rates do to solve that problem?<\/p>\n

4. Without a blink, the journalist then starts talking about oil price rises driving inflation, apparently oblivious to his previous few paragraphs where he imputes the inflation is being driven by excessive demand (spending), which needs to be curtailed by interest rate rises and a withdrawal of liquidity via the central bank bond-buying program.<\/p>\n

This is a characteristic of this sort of media analysis.<\/p>\n

The journalists have a grab-bag of dot points they seek to work into every article – inflation, deficits, bond-buying, oil, who won last week’s football game, etc<\/p>\n

But at least we are acknowledging the impact of oil price rises – including those provoked most recently by Putin’s folly.<\/p>\n

But while we are talking ‘transitory’, we are now into day 20 of the illegal invasion. And I just noticed that the price of WTI Crude (for example) just plunged 5.99 per cent and Brent Crude was heading back towards $US100 per barrel (dropping 6.44 per cent today already).<\/p>\n

The Op Ed seems to think that the previous hikes will persist.<\/p>\n

They are completely transitory – meaning they are not going to remain at these high levels indefinitely.<\/p>\n

The task for governments is to ensure the wholesalers and the retailers pass on the fluctuations downwards as much as they push the prices up when crude oil rises in price.<\/p>\n

5. Yes “The invasion has also sparked steep increases in the prices of other commodities, including agricultural commodities” which will have devastating impacts on poorer nations that depend, for example, on grain imports from the affected part of the world.<\/p>\n

But those price rises are all supply driven and temporary.<\/p>\n

The journalist again emphasises that the conflict has “also added to the severe disruptions to global supply chains that were only just starting to ease.”<\/p>\n

Yes, so why hike interest rates? What model of the world will see higher rates cure these “severe disruptions”?<\/p>\n

6. Then we get the next strategy in these sorts of articles – the scary number scenario:<\/p>\n

\nThe US inflation rate will inevitably have at least an “8” in front of it and perhaps even a “9” as the flow-on effects of the responses to the invasion and Russia’s countermeasures start to show up.<\/p>\n

In the circumstances the Fed ought to be going hard. It should have gone hard much earlier. A 50 basis point rate rise (which many in the markets had expected until very recently) and an immediate start to running down the $US8.9 trillion ($12.2 trillion) of assets in its balance sheet and removing liquidity from the system would be a good, if belated start.\n<\/p><\/blockquote>\n

A central bank can only go “hard” by increasing interest rates or using other measures to make it impossible for credit to be created (more difficult than interest rate rises).<\/p>\n

How pray tell will that do anything other than push up business costs, trigger further abuses of market power and further price rises to regain margin lost through the cost rises, and, ultimately, generate further unemployment and underemployment.<\/p>\n

Meanwhile, the inflationary pressures will abate and the US and any other nation stupid enough to follow this advice will be left with a legacy of stagnation, mass unemployment and increased poverty etc.<\/p>\n

Further, what are the implications of the Federal Reserve “running down” its bond purchases?<\/p>\n

Most of the increase in its assets are in the form of government debt. Government buying its own debt.<\/p>\n

So they offer the debt back to the secondary market at some discount? At the scale the journalist is thinking about that would cause substantial capital losses to existing bond holders in the non-government sector as the increased supply would force bond prices down.<\/p>\n

And, who would buy the debt? Those who wanted to rearrange their wealth portfolio presumably. Note that portfolio is not currently being spent on goods and services but stored as a wealth stock.<\/p>\n

So how much difference to total spending on price sensitive goods and services would such a asset sell-off actually have? Not much.<\/p>\n

7. Then – par for the course sort of stuff – we get the out of control inflationary expectations argument:<\/p>\n

\nThe Fed, and other central banks, do face some invidious choices because much of the spiralling of inflation rates is already baked into corporate and consumer expectations.\n<\/p><\/blockquote>\n

Well, the data on inflationary expectations is nuanced at present.<\/p>\n

For example, go to the New York Federal Reserve, which publishes its – Consumer expectations of inflation<\/a> – on a monthly basis.<\/p>\n

In February 2022, the ‘Median one-year ahead’ and the ‘Median three-year ahead’ expectations rose.<\/p>\n

But they were reversing “some of January’s sharp declines.”<\/p>\n

Two points:<\/p>\n

(a) What happened in February? Putin invaded. Otherwise, the series were heading south!<\/p>\n

(b) Note the ‘three-year ahead’ expectation is only 3.8 per cent – a much less scarier number than 8 per cent, for example.<\/p>\n

So even with all these supply-side disruptions and the Putin folly, US consumers do not expect inflation to be running out of control in a few years hence.<\/p>\n

They seem to understand what the word ‘transitory’ means?<\/p>\n

8. After several paragraphs raving on about supply constraints and war etc, the journalist remembers he better rail against fiscal policy:<\/p>\n

\nThe fiscal splurges in response to the pandemic have left consumers awash with cash and given companies still struggling with malfunctioning supply chains a rare opportunity, which they are seizing, to raise prices even as continuing pandemic-related shortages of labour, particularly cheap labour, is creating wage inflation.\n<\/p><\/blockquote>\n

Note the word “splurges” – emotively trying to connect to the reader and invoke a sense of waste and profligacy.<\/p>\n

Last time I looked the US unemployment rate was at 3.8 per cent down from the initial pandemic levels of nearly 15 per cent. Labour force participation is up and the usual disadvantaged minorities are enjoying better labour market conditions.<\/p>\n

Further, the most recent BLS data, which I analysed in this blog post – US labour market improves but slack still remains with no wage pressures emerging<\/a> (March 7, 2022) – showed that “Average hourly earnings for all employees on private nonfarm payrolls, at $31.58 in February, were little changed over the month”.<\/p>\n

And, over the year to January 2022, real earnings are significantly lower. Workers are not catching up with the price level rises and can hardly be said to be pressuring inflation.<\/p>\n

And, “Nonfarm business sector labor productivity increased 6.6 percent in the fourth quarter of 2021 … as output increased 9.1 percent and hours worked increased 2.4 percent … From the fourth quarter of 2020 to the fourth quarter of 2021, nonfarm business sector labor productivity increased 1.9 percent … Annual average productivity increased 1.9 percent from 2020 to 2021.”<\/p>\n

So with real wages declining and productivity rising, unit costs are falling in the US.<\/p>\n

The claim that wage inflation is driving general inflation in the US is not borne out by the facts.<\/p>\n

Wages have risen in nominal term – that is ‘wage inflation’. But smart analysts make an assessment on what is happening to unit labour costs.<\/p>\n

Productivity growth provides the ‘non inflationary’ space for nominal wages to rise – that is, without putting pressure on the price level for goods and services.<\/p>\n

It is a pity that this journalist’s readership is so badly served.<\/p>\n

9. We get to the nub of the intent finally:<\/p>\n

\nThe Fed now has to play catch up. The market expects and is pricing in at least six 25 basis points before the end of this year … <\/p>\n

The US sharemarket is already down 12 per cent since the start of the year, including a four per cent fall this month.\n<\/p><\/blockquote>\n

The market has placed bets in forward contracts on the Federal Reserve pushing up rates. They will make big profits on these bets if the central bank ratifies them.<\/p>\n

That is why they are pushing the narrative that rates ‘have to rise’.<\/p>\n

“Pricing in” just means they have made the bets and carries no substance in economic terms.<\/p>\n

Similarly, who cares about what happens in the sharemarket?<\/p>\n

The unemployed in decaying neighbourhoods in American cities certainly don’t care if the wealth lose speculative bets on sharemarket trends.<\/p>\n

10. Then the devil’s choice:<\/p>\n

\nThe Fed is going to have to choose between allowing inflation to rage out of control or risking a recession.\n<\/p><\/blockquote>\n

There is no such choice.<\/p>\n

Inflation will moderate when the causal factors moderate.<\/p>\n

A once-in-a-century (or whatever) pandemic is hardly usual faire. When (if) we get beyond the sickness and death caused by the virus, the supply issues will abate.<\/p>\n

Putin’s war won’t go forever.<\/p>\n

There is no suggestion inflation will ‘rage out of control’. It will remain at elevated levels for as long as the disruptions persist.<\/p>\n

The last thing that any central bank should do now is deliberately create a recession.<\/p>\n

Conclusion<\/h2>\n

Central banks need to be patient and make sure its messaging stays on track – supply disruptions, war, transitory.<\/p>\n

Fortunately, many are showing that degree of cautiousness.<\/p>\n

That is enough for today!<\/p>\n

(c) Copyright 2022 William Mitchell. All Rights Reserved.\t\t<\/p>\n","protected":false},"excerpt":{"rendered":"

It is hard work being an economist. Especially when about 90 per cent of what one reads each day is fiction masquerading as truth. That wouldn’t be so bad because fiction is good when it is in the right place. But in this context, the fiction that comes out from economists and their lackeys in…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[9,70,28,56],"tags":[],"class_list":["post-49418","post","type-post","status-publish","format-standard","hentry","category-central-banking","category-fiscal-statements","category-inflation","category-us-economy","entry","no-media"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts\/49418","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=49418"}],"version-history":[{"count":0,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts\/49418\/revisions"}],"wp:attachment":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=49418"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=49418"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=49418"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}