While blowing up balloons for our youngest granddaughter’s birthday party yesterday – she’s two years of age – thoughts turned to inflation of another sort, that measured by rising prices.
The Federal Reserve Board is on a continued quest to reach, then exceed slightly, a two-percent annual inflation for the United States. These federal bankers are attempting to do so by creating excess monetary liquidity aimed at supercharging the economy and meanwhile holding interest rates to historically low levels.
So far, the inflation quest isn’t working according to government figures, which put the price inflation rate in the U.S. for 2020 at 1.4 percent.
Other sources, such as ShadowStats, beg to differ with that official report. ShadowStats attempts to measure the inflation rate in the old manner (more on that in the next paragraphs) and estimates inflation for 2020 of 8.9 percent, down from 9.5 percent in 2019, but still multiples of the official figures.
If you do much shopping for extravagant luxuries such as food or energy, or you pay rent or property taxes on a home you own, or you purchase healthcare or transportation, you probably tend to believe the ShadowStats inflation figures, which don’t utilize substitution or the suggestively named hedonic adjustments.
Inflation measures often involve a basket of goods. Substitution is the presumption that if the price of steak in that basket soars, people will instead purchase more hamburger, or chicken, or pork. This is disingenuous in my book because regardless of how you change your eating habits to address price inflation, the price of steak and thereby the inflation rate on that basket of goods, increased.
Hedonic adjustments, which sound ironically close to hedonism – the pursuit of pleasure and personal self-indulgence – tries to factor in quality. A higher-performing computer, while costing more, might have its inflationary price impact adjusted downward because it is judged to be a qualitative improvement.
Again, this is questionable in my book. Most people never challenge the capabilities of their computers, so if a new one performs a tad better than the one it replaces, but costs a couple of hundred bucks more, that’s still price inflation in my book.
The Fed is playing a dangerous game with attempts to goose inflation. History presents many examples of how such fiddling with fire explodes to inferno stature.
While the Fed would find 2 percent inflation favorable, it would have figurative blood flowing in the financial streets if inflation hit 15 percent, as it nearly did in April 1980 (14.76 percent). For the entire year of 1980 the United States inflation rate was 13.5 percent.
So, the Fed wants inflation because it tends to encourage household spending and boost the economy. And, as long as the inflation rate doesn’t get too high, it doesn’t result in wage-demand inflation.
But rising inflation does put artificially low interest rates under pressure. Treasury Secretary Janet Yellen, former head of the Federal Reserve, said during Congressional testimony recently that while our national debt levels are troublesome, those historically low interest rates make this a great time to “act big” in doling out stimulus cash to individuals, businesses, and other concerns.
Our federal government already is the world’s largest debtor and those stimulus handouts are going to be paid for by increasing the debt. If a rise in inflation beyond the Federal Reserve’s modest 2 percent target results in spiking interest rates, the increased amount of money necessary to pay debt holders would severely cramp the government’s ability to fund traditional services.
The 30-year government bonds currently yielding under 2 percent, were paying over 14 percent in 1980. A return to such higher interest rates would be disastrous fiscally.
The Federal Reserve is attempting to thread the needle of provoking 2 percent inflation while avoiding going much higher on that measure and thereby pushing interest rates significantly higher.
If it fails, we all get the equivalent of a sharp needle in the eye.
Sam Ross Jr's site 