Businesses and consumers can be forgiven for missing the economic signals.
The monetary authorities have some explaining to do Inflation is at forty-year highs in Britain and America. In the eurozone, it is the highest since the monetary union was created almost a quarter of a century ago. Only 18 months back, at the start of 2021, consumer prices were barely rising at all: inflation was about 1 per cent in all three economies. Now it is around 9 per cent.
The upsurge in inflation has been a huge shock to businesses facing higher costs and families struggling to make ends meet. Their surprise, after years of low and stable inflation, is understandable. What is harder to understand is that central banks have also been blindsided—even though their main job is to keep a lid on prices by hitting 2 per cent inflation targets.
As the world’s most influential central bank, America’s Federal Reserve plays a particularly important role in setting global monetary conditions. Over the course of 2021, US inflation rose from 1.4 per cent in January to 7 per cent in December. Yet for much of that period, the Fed’s chair Jerome Powell insisted that the rise would be “transitory.” It was only towards the end of the year that the Fed recognised this was wishful thinking.
The Bank of England has also got things hopelessly wrong. Its recent inflation forecasts now make for red faces at the central bank. In May 2021, the Bank projected inflation of 2.3 per cent in a year’s time; instead, it was more than 9 per cent. In November 2021, the BoE expected inflation to rise to around 5 per cent in April 2022, and then to fall back to 3.4 per cent by the end of the year, but last month it predicted a peak of above 11 per cent this October....
....MUCH MORE
This is a very real problem and probably means a Fed overshoot is baked in the cake....
Here's the monthly U.S. CPI headline number from Trading Economics (also on blogroll at right):
source: tradingeconomics.com
And here is a June 29, 2022 post:
Ahead of Tomorrow's Personal Consumption Expenditures Inflation Report, A Reminder
The PCE, the measure the Federal Reserve Board says it watches most closely, what with its under-weighting of shelter costs—half that of the CPI, which itself is distorted lower by using Owner's Equivalent Rent—and all, first crossed the Fed's 2% line in March 2021.
The Fed could have acted on its balance sheet and on interest rates at that time.
Giving them the benefit of the doubt, that they wanted to be sure a rising trend was in place, they could have acted after the April release.
Ditto for a desire to target 2% as an average, meaning running hotter than 2% to bring the trailing average up. By May 2021 with the PCE printing at almost double the Fed's stated target there was no reason to delay tapping on the brakes, beginning the interest rate hiking cycle and announcing the start of Quantitative Tightening - perhaps not going into run-off mode but balancing new purchases of treasury's and Agency MBS's with maturing paper.
They didn't.
And for some reason the Fed thought it more important to delay action than it was to appear credible; what with the "transitory" talk and all. And the Fed kept delaying, and kept on spouting non-sense for a year after they should have taken action.
Again, for emphasis, the Fed knowingly decided to look like stupid liars rather than honestly explain what they were up to. The question is: Why would they do that?
All I can surmise is that it must be something really, really big to let CPI inflation get to 8.6% [note: May CPI] while talking stupid shit all the way up.
From Trading Economics (also on blogroll at right) the monthly YoY PCE prints:
