Ahead of Friday's release of the Personal Consumption Expenditure index and its deflator, something to think about.
From the Institutional Risk Analyst, May 6 (also on blogroll at right):
In this issue of The Institutional Risk Analyst, Brian Barnier (www.feddashboard.com and City University of New York) discusses why the "data dependent" analytical process used by the Federal Open Market Committee for measuring inflation may be measuring the wrong thing.
Price indices don’t really say what policymakers think they say.
Central bankers often act as though price index statistics are the same as the “generalized price level” of theory -- and the level is caused primarily by monetary factors. Yet, hard data and daily life – especially during COVID – show that this assumption is false. That means a 2% target of any flavor isn’t what the FOMC thinks it is. The Fed's 2% inflation target needs to be replaced in a specific way. And investors need to embrace the data in order for the measure to be credible.
“Monetarism” is widely debated. Oddly, the monetarist assumption of “inflation” is widely accepted. “Inflation” is assumed to be 1) change in generalized price level that is primarily caused by money supply (or at least monetary factors) and 2) that the “generalized price level” is statistically represented by a weighted aggregate average of product prices.
The Federal Open Market Committee looks to the Bureau of Economic Analysis’ (BEA) Personal Consumption Expenditures (PCE) Implicit Price Deflator. (Statistically more appropriate for monetary policy than the Consumer Price Index (CPI) used for Treasury Inflation-Protected Securities.) This index is calculated from hundreds of product prices obtained or imputed by the BEA, Bureau of Labor Statistics (BLS) and Census Bureau.
The Five Realities
In a “Stats 101” sense, price indices are invalid for statistical inference because the average lacks a single mode and stable standard deviation. This is because prices by category have been diverging. Services prices up, nondurable goods (think food and energy) flat for a decade and durable goods down since 1995 (starting with electronics in the 1970s).
Price categories changing in different directions – not a uniform monetary cause, as illustrated in the chart below.
Falling durable goods prices are mostly the result of the global tech and trade transformation (with a recent uptick from the Trump-Biden tariffs and COVID). Plus, shoppers buy more when prices fall – busting the myths that falling prices mean weak demand and rising prices are needed fear to “induce” purchases.
- Rising services prices have mostly come from housing (it is estimated as a service of imputed rent), health care and financial services.
....MUCH MORE
If interested see also August 16's "Inflation: The Differences Between The PCE Index and The Consumer Price Index" and July 22's "Société Générale's Albert Edwards "Notices 'Something Shocking' In The 'Transitory vs Persistent Inflation' Debate"
