Inflation: Official Rate vs. Observed Rate

[Magus]

A few comments. One, those measures are all Central Bank monetary policy tools, not “the government”. The Central Bank is an independent authority. Two, the Fed has other tools, most importantly trying to influence “expected inflation”, followed by quantitative easing. Finally, and also very important, our elected representatives in Congress also have tools to influence the rate of inflation, by increasing or decreasing public spending and taxation. That has considerable impact on GDP growth and inflation.

In theory true, however the Federal Reserve was created by an act of Congress, can be changed at will by a new congressional act, and its Board of Governors are nominated by the President. Additionally, a large part of the profits of the Fed Reserve go to the Treasury. I think its safe to say its not entirely independent in practice, although probably moreso than most other institutions.

You are of course correct the Fed Res has the tools to combat inflation, but has shown since 2009 that they are reluctant to raise rates in an uncertain economy.

 

[2177V]

A few comments. One, those measures are all Central Bank monetary policy tools, not “the government”. The Central Bank is an independent authority. Two, the Fed has other tools, most importantly trying to influence “expected inflation”, followed by quantitative easing. Finally, and also very important, our elected representatives in Congress also have tools to influence the rate of inflation, by increasing or decreasing public spending and taxation. That has considerable impact on GDP growth and inflation.

Understood. But the bigger question is: Why don't they start using these tools? Inflation just hit a 31 year high according to what I have read.

Once the public and the investors are observing that nothing is being done about inflation....then that is not a good thing IMO.

Remember that the market is about greed versus fear. Both are human emotions which can be irrational at times. An example of greed: There was an oil refinery fire in S. California and the next day, some gas stations immediately raise the price of gasoline 20 cents even though the gasoline in their underground storage tanks was purchased at wholesale prices before the fire. As example of fear: People starts to hoard things because they become afraid that the prices will go up tomorrow thus creating a tighter supply which artificially cause inflation.

My concern is that inflation may spin out of control based on irrationale human behavior which makes these tools less effective. The government policy makers and the Fed are playing with fire. The news media are also fanning the flame. Even a small interest rise or a re-assurring statement by the Fed can signal to the general public and investors that they got this.

 

[Aerides]

Understood. But the bigger question is: Why don't they start using these tools? Inflation just hit a 31 year high according to what I have read.

Though I might be thinking "come on already a quarter point at least" I'm not a lifetime expert economist, and I'm sure they have far more data and analysis at their disposal. I'm quite sure they are smart enough to know when to, and when not, and how much, and I'll wait and see.

Now that employment numbers are looking pretty darn good, I'd be surprised if there weren't some moves made in the next 60 days.

 

[2177V]

Though I might be thinking "come on already a quarter point at least" I'm not a lifetime expert economist, and I'm sure they have far more data and analysis at their disposal. I'm quite sure they are smart enough to know when to, and when not, and how much, and I'll wait and see.

Now that employment numbers are looking pretty darn good, I'd be surprised if there weren't some moves made in the next 60 days.

I hope you are right.

I worked in the federal government for 34 years before retiring and my favorite saying: If it does not make sense, then it's politics.

Here is a Oct 21 2021 article on a conflict of interest by senior Fed officials including Powell:

https://www.politico.com/news/2021/10/21/fed-cracks-down-scandal-516534

It is quite possible that the Fed does not want to raise interest rates until AFTER certain Fed officials sell off their equities first. However, they got caught in this conflict of interest so I am glad these new rules are now in effect.

 

[swaneesr]

Tool #1: Raise Interest Rates
Tool #2: Make the banks increase their reserve requirements
Tool #3: Reduce the money supply

The Fed appears to be more worried about the side effects of negative growth than inflation.

Excuse my ignorance.

Tool #1 - rates have been so low for so long. If rates were higher, doesn’t that give the Fed the ability to slow or speed the economy? Don’t these low low rates make Tool #1 less effective?

Tool #3 is quantitive easing? The plan is to reduce the supply as COVID stimulus runs through and is spent?

Isn’t Jerome Powell in a tough spot? Raise rates and lower the stock market getting investors upset? Allow too much inflation and feel the heat from those watching energy prices and the grocery bill?

Swanee

 

[JT90505]

I have lived in CA my whole and I have never seen a property tax rate as low as 1.07%. I can view 9 properties in my immediate family and not one comes close to that rate. I also volunteer as a tax preparer and I have never ever once seen anything remotely close to that rate. The best I've seen is about 1.25% and I've seen as high as 2%.

Pointless to continue this discussion.

 

[2177V]

Tool #1: Raise Interest Rates
Tool #2: Make the banks increase their reserve requirements
Tool #3: Reduce the money supply

The Fed appears to be more worried about the side effects of negative growth than inflation.

Excuse my ignorance.

Tool #1 - rates have been so low for so long. If rates were higher, doesn’t that give the Fed the ability to slow or speed the economy? Don’t these low low rates make Tool #1 less effective?

Tool #3 is quantitive easing? The plan is to reduce the supply as COVID stimulus runs through and is spent?

Isn’t Jerome Powell in a tough spot? Raise rates and lower the stock market getting investors upset? Allow too much inflation and feel the heat from those watching energy prices and the grocery bill?ey

Swanee

In my view, one of the causes of inflation is too much money in the system. So my answers to your questions:

If interest rates were higher then the fed can lower interest rates to stimulate the economy or raise interest rates to control inflation. Inflation is the more urgent problem so we can expect interest rates to rise. Low interest rates as we currently have should not make tool #1 less effective.

Quantitative easing is when they inject more money in the system to stimulate the economy. Tool #3 is, in a sense, the opposite. Tool #3 is intended to reduce money in the system to control inflation.

Yes J Powell is in a difficult situation. When you reduce the money supply and/or increase interest rates to control inflation, this has the tendency to suppress business activity and economy and therefore the stock market may decline. This is why inflation alarms investors but inflation also alarms the general public too. I expect the Fed to use these tools to control inflation but hopefully in such a way that the impact on unemployment and the stock market will be minimal.

The overall mission of the Fed is to ensure a healthy economy. This means low unemployment, 2% inflation which is a healthy inflation rate, low volatility in the stock market (which is why they have to be careful on what they say), and sustained economic growth. Employing the inflation tools may cause higher unemployment and a possible recession so they have to be careful.

 

[jkern]

My property tax rate in the Bay Area is .3% (rounded up - it is actually a bit less). Some of our older neighbors are paying .07%. They bought their houses years ago when home prices were under $50K. It must depend on the neighborhood.

I think it's impossible to have a property tax rate of 0.3%. The base tax rate for CA is 1% of assessed value plus add ons. Maybe you are comparing your tax rate to market value not county assessed value.

 

[daylatedollarshort]

I think it's impossible to have a property tax rate of 0.3%. The base tax rate for CA is 1% of assessed value plus add ons. Maybe you are comparing your tax rate to market value not county assessed value.

I was comparing it to market value.

 

[all4j]

I’ll throw out a few scattered thoughts suggesting a bit of caution on considering future course of action, especially when looking at success/failure with past episodes of inflation. 1st a reminder, inflation is essentially a manifestation of an imbalance between supply & demand. What is being supplied/demanded? Might be labor, dollars, commodities, etc. So, consider, for example, 2 (of many possible) scenarios: (1) money supply has been increased greatly to stimulate business; (2) oil supply has been cut back by foreign suppliers & country is heavily dependent on foreign oil. The approach for those 2 scenarios should be different.

Now, consider current environment. Certainly money supply has been accommodative. But, government has been competing for those dollars by spending more than it takes in (& more spending on the way) also. Labor is interesting as the “Great Resignation” is underway. Wages have increased some in places, but there seems to be a shift going on where jobs aren’t being filled due to work/life balance issues more than wages. Immigration laws are causing some agricultural jobs to not be filled at any wage. Products can’t be exported due to shipping problems. Supply chain issues are often causing the supply to be lower even though demand isn’t. USA hasn’t been as dependent on foreign oil as at times in the past; but with regulatory environment being such as it is regarding climate change, should we really expect supply of oil to increase? (Sure, government can tap strategic reserves for bandaid, but that isn’t a “long term” solution is it?).

I’ve not seen anything approaching delineation of which factors are contributing what to current inflation numbers. I think we’re just now starting to start of some behavioral changes from the inflation. It will hit the poorer folks 1st as a greater share goes to fuel (car gas, home heating, etc). Bare shelves for holiday shopping will dampen morale as well as profits for retailers.

Not just saying “this time is different”. But some of the present causes of inflation may not be solvable by central bank alone & taking the wrong path forward, at the wrong time, has potential to compound the problem. Just sayin’!

 

[GravitySucks]

Wonder how much of this inflation is caused by external forces.
The yuan is up around 6% this year vs. the dollar and Euro.
The Saudis seem to have been successful in raising oil prices.
While lower than the US inflation rate Germany and France are suffering their highest rates of inflation in years.
I'm sure the tax cuts and pumping money into everything is a factor but there's other winds in our face too.

 

[daylatedollarshort]

I’ve not seen anything approaching delineation of which factors are contributing what to current inflation numbers

One is the link I posted previously that shows that many retired. "...Goldman Sachs researchers led by Jan Hatzius finds that 3.4 million of the people who left the labor force - meaning they're not working or aren't actively looking for work - are over 55. Roughly 1.5 million of them were early retirements, and 1 million were normal retirements. Those two groups of retirements "likely won't reverse," meaning that, out of the five million workers Goldman estimates are still missing from the labor force, about half may not ever return." https://www.yahoo.com/news/goldman-just-figured-why-labor-195246080.html

Extended high stock market returns are likely helping more people retire. Although the Goldman article didn't mention it as a factor, we are approaching 1M excess deaths in the U.S. during the Covid years, and presumably some of those people were in the labor market previously.

 

[all4j]

One is the link I posted previously

I appreciate the article, but think I perhaps wasn't clear; let me try & re-state for the labor component. IF the labor aspect were totally resolved, how much of current inflation would "go away" because it was attributed to that? If these people had NOT retired, how much lower would inflation be?

To me, it is not unlike unraveling the roots of an uprooted plant...not sure you ever really can. But, it would be beneficial to objectively determine relative size...what are largest contributors?

 

[daylatedollarshort]

Just found another analysis by Goldman Sachs. They discovered my favorite Reddit forum - antiwork. "Goldman said in a note on Nov. 11 that there is a “long-run risk” to labor force participation: a general distaste for work. The bank’s economics team pointed to the reddit thread r/Antiwork, a social media community carrying the mantra “Unemployment for all, not just the rich!” https://711web.com/the-anti-work-mo...isk-to-workforce-participation-goldman-sachs/

 

[ivinsfan]

Just found another analysis by Goldman Sachs. They discovered my favorite Reddit forum - antiwork. "Goldman said in a note on Nov. 11 that there is a “long-run risk” to labor force participation: a general distaste for work. The bank’s economics team pointed to the reddit thread r/Antiwork, a social media community carrying the mantra “Unemployment for all, not just the rich!” https://711web.com/the-anti-work-mo...isk-to-workforce-participation-goldman-sachs/

" a general distaste for work", I'm shocked I tell you, just shocked....

 

[SecondCor521]

The overall mission of the Fed is to ensure a healthy economy. This means low unemployment, 2% inflation which is a healthy inflation rate, low volatility in the stock market (which is why they have to be careful on what they say), and sustained economic growth. Employing the inflation tools may cause higher unemployment and a possible recession so they have to be careful.

The Fed's objectives, which Powell and the other Fed chairs before him repeatedly state, are full employment and 2% inflation. Powell liked to add with symmetric risk on the inflation target, and recently started saying that they'd let inflation run higher than that for a while (to somehow balance out the low inflation we'd had for so long).

There isn't really anything in the Fed mandate, as I understand it from listening to them for years, about the stock market. Yes, other people say stuff, and some factions want to put pressure on the Fed to act in various ways to various effect in the market, but in theory what the market is doing and how volatile or not it might be, is not their concern.

 

[2177V]

The Fed's objectives, which Powell and the other Fed chairs before him repeatedly state, are full employment and 2% inflation. Powell liked to add with symmetric risk on the inflation target, and recently started saying that they'd let inflation run higher than that for a while (to somehow balance out the low inflation we'd had for so long).

There isn't really anything in the Fed mandate, as I understand it from listening to them for years, about the stock market. Tell Yes, other people say stuff, and some factions want to put pressure on the Fed to act in various ways to various effect in the market, but in theory what the market is doing and how volatile or not it might be, is not their concern.

I will always believed that the FED rather have zero or low unemployment and 2% inflation and low volatility in the stock market than helping investors get rich. During the last record breaking pre-Covid bull market, the FED raised interest rates to cool down the economy so I thought they did a good job. During COVID, the FED also did a good job helping the market recovered with QE. If they control inflation without causing a severe stock market decline then they will be 3 for 3. However, the current problem of accelerating inflation and a weak economy due to Covid is the most severe challenge of the 3. It will be interesting to see what happens.

 

[aja8888]

Here's a summary of the chages to the FED's dual mandate of 1977 and later:

https://www.richmondfed.org/publications/research/econ_focus/2021/q1/federal_reserve

(2021)

The original 2012 statement on longer-run goals outlined how the Federal Open Market Committee (FOMC), the Fed's policy making body, would seek to achieve its dual mandate from Congress of maintaining maximum employment and stable prices. The FOMC announced as its goal an inflation rate of 2 percent, measured by the personal consumption expenditures (PCE) price index. It declined to set a specific target for maximum employment, noting that the maximum level of employment the economy can sustain changes over time and is largely driven by non-monetary factors.

The Fed's new framework sets a goal for inflation that averages 2 percent over time, meaning that the FOMC will now allow periods of higher inflation to make up for periods of inflation below target. On employment, the Fed's framework now emphasizes that full employment is a "broad-based and inclusive goal." Additionally, the FOMC pledges to respond specifically to shortfalls from maximum employment rather than "deviations" as in the 2012 statement, which implied that too much employment could be as problematic as too little.

These revisions, which the FOMC reaffirmed this January (2021, were the culmination of a year-and-a-half long public review of monetary policy conducted by the Fed.

So basically:

1. Max employment
2. Stable prices
3. 2% target infaltion

 

[SecondCor521]

^ Right. The point I was making to @vchan2177 is that nowhere in their mandate or goals does it say anything about the stock market.

Some people may wish that it did, but it doesn't.

 

[Magus]

UK inflation came in hot today - 4.2% vs 3.9% expected

 

[2177V]

My wife decided to raise prices for her small business in a few months starting in January 2022. Her commercial rent went up 15% for her lease and her employees are clamoring for a pay increase. Her employees also need to keep up with gasoline prices, food prices and their own apartment rent increases and my wife cannot afford to lose them. Her competitors already raised their prices so inflation is happening everywhere in California. We may be heading toward double digit inflation.

 

[SecondCor521]

My wife decided to raise prices for her small business in a few months starting in January 2022. Her commercial rent went up 15% for her lease and her employees are clamoring for a pay increase. Her employees also need to keep up with gasoline prices, food prices and their own apartment rent increases and my wife cannot afford to lose them. Her competitors already raised their prices so inflation is happening everywhere in California. We may be heading toward double digit inflation.

I believe the term is wage-price spiral. The solution, as I understand it, is to reduce the money supply and/or raise interest rates. Wish us luck, we'll probably need at least some.

 

[Gumby]

I believe the term is wage-price spiral. The solution, as I understand it, is to reduce the money supply and/or raise interest rates. Wish us luck, we'll probably need at least some.

Where is Paul Volcker when you need him?

 

[SecondCor521]

Where is Paul Volcker when you need him?

Just checked - he passed away, unfortunately.

But a lot of people were cursing his name in 1981 or so, I think. I expect the same for whichever person (if any) does it this time around.

People these days talk about punchbowls and such.

I'll stop; I'd rather the conversation stay on economics and policy and not drift into Porky territory.

 

[2177V]

Where is Paul Volcker when you need him?

Based on the following link:
https://www.thebalance.com/who-is-paul-volcker-3306157

I cut and pasted what Volcker did and how he solved inflation:

"Thanks to Volcker, central bankers realize the importance of managing inflation expectations. As long as people thought prices would keep rising, they had the incentive to spend now. The added demand drove inflation even higher. Consumers stopped spending when they realized Volcker would end inflation. Businesses stopped raising prices for the same reason."

My question: Since the government knows how to control inflation, why isn't the government doing it?

Chairman Powell is no Paul Volcker. Unfortunately, replacing Powell may roil the stock market from what I have read. Powell did do a good job raising and lowering interest rates pre-pandemic. His QE helped during the pandemic. However, I am now losing confidence in him...but that is my opinion.