Un-frickin-believable:
"Delivering a speech to the National Bureau of Economic Research, the Fed chief said "changes in energy [and food] prices should have relatively little influence on ‘core’ inflation, that is, inflation excluding the prices of food and energy."
(emphasis added)
There you have it — straight from the Fed Chair’s own mouth — except for the items going up in price, there is no inflation!
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UPDATE: July 11, 2007 8:31am
Peter E. Kretzmer, senior economist for Bank of America, explains (more or less) what the Fed means by relating "inflation expectations" to the ability of the Fed to impact price rises (i.e., stability):
“This Fed much more so than prior Feds puts a very heavy emphasis on the role of inflationary expectations,” he said. “They believe, and research shows, that inflation expectations and the Fed’s inflation-fighting credibility has a large impact on private sector wage- and price-setting behavior.”
In other words, the Fed’s emphasis on Core inflation — jawboning, PR, propaganda, whatever — is every bit as important to future prices as the actual underlying causes (excessive monetary creation, demand exceeding commodity supplies) of inflation.
I am not sure I buy that. Surely, psychology is important, and the collective expectations of either higher or lower prices can impact subsequent price behavior.
But this approach puts the Fed into the role of a low price cheerleader, and runs the dangerous risk fo well, artificially emphasizing the irrelevant core rate of inflation rather than dealing with reality of the actual price increases as experienced by consumers.
Additionally, it means that all of the prior chatter about removing volatile food energy prices due to their erratic price behavior was quite simply bullshit. Based on yesterday’s Bernanke speech, we learn that the emphasis on the Core rate of inflation is about influencing psychology and sentiment — not smoothing out volatile data.
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UPDATE 2: July 12, 2007 11:31am
Herb Greenberg mentions the latest comments from the CEO of Nestles:
Here’s the article:
Nestle to cut plants, products as prices soar
Nestle, the world’s largest food company, will raise prices, cull unprofitable products and speed up production rationalization to prepare for a lasting rise in commodity and energy prices.Jose Lopez, management board member at the Swiss-based firm, told Reuters the group’s focus on name-brands, health food, and medical nutrition puts it at a competitive advantage as prices for energy, grain and milk rise on surging demand.
Rising input prices globally will stoke inflation, which will enable Nestle — maker of KitKat chocolates and Nespresso coffee — to pass those costs on to consumers, Lopez said in his first interview as head of operations for the global giant.
"It could provoke moderate inflation and moderate inflation is not a bad environment for business," Lopez said in his first interview as head of operations for the global giant. "If anything, I can buy better because I am bigger."
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Sources:
Wall Street gets smacked
Major gauges fall over 1 percent after series of earnings warnings, more subprime news; investors weigh Bernanke speech.
David Ellis
CNNMoney.com, July 10 2007: 5:50 PM EDT
http://money.cnn.com/2007/07/10/markets/markets_530/index.htm?postversion=2007071017
Fed Chairman’s Talk Further Dims Hope for a Rate Cut
JEREMY W. PETERS
NYT, July 11, 2007
http://www.nytimes.com/2007/07/11/business/11fed.html
What I assume he means is that food and energy inflation has not yet pressured prices of items in the core CPI.
So its a bit less insane than it appears . . .
That’s what he means. For example, higher energy prices push up the price of transport – what Bernanke is saying is that he expects this effect to be small.
Barry,
What Bernanke meant was, if inflation expectations are anchored (i.e. do not rise), then a ONE TIME increase in food or energy prices should have little influence on inflation.
How do we know if expectations are anchored? BB says look at: Wolverine Survey, TIPS spread, ISM prices paid. This in fact was the most telling part of his speech. He left out commodity prices as a measure of inflation expectations!
In other words, if commodity prices rise, its some freak supply demand thing. Nothing to do with money supply, real rates, the Fed, or inflation expectations.
The view that commodity prices are not a valid measure of inflation expectations is so blind as to be negligent.
What he is saying is that with the hedonic adjustments, geometric weighting, and substitution, it is possible to ignore inflation by using the core CPI.
What he really meant is that the game is rigged and he’s running the wheel. The ball always lands in the no inflation slot.
The Big Picture
Un-frickin-believable: Delivering a speech to the National Bureau of Economic Research, the Fed
I like to start the day with a good laugh…
I LOVE substitution. I’ve gone from poached salmon to catfish fillets to fish sticks and now I’m eyeing tabby food. Same protein content. Why sould I bitch? At some point, the ‘people’ will go from i Macs to big Mac’s to Mac 10’s. Well you can always substitute uzi’s for mac 10’s.
In the last 3 paragraphs they insinuate that higher rates as a fix for inflation is “speculation” and needs some more “examining”…yeah…what a country…
The Fed influences price-setting behavior in the private sector? Not likely. Outside of Wall Street, no one cares, nor pays the slightest attention to what the Fed says on any subject.
It’s also to screw pensioners.
It is so hard to keep myself from worrying that Ross is the most prescient of us. . .
and the dollar loves all this news…
I actually don’t object to the removal of energy and food from the equation, as these items respond to true laws of supply and demand rather than artificial, debt-created demand.
However, it seems to me that with geometric weighting, hedonic adjustments, and particularly substitution, what the Fed is trying to guage with core inflation is not inflation at all, but the country’s ability to consume.
Ben is just trying to make it look like he has bigger balls in this game than he really does. We all know he doesn’t anymore.
China, Russia, and all the other owners of our t-notes have our collective balls in a jar. It’s up to them now. Paulson and Gentle Ben better go pick out some pretty lipstick.
We’ve heard about your dissatisfaction with Core CPI a thousand times, but I don’t think we’ve heard:
1) Is Core CPI still a useful measure of anything, or would you cease to report it entirely?
2) Is there some other adjusted measure you would substitute for it?
3) Anecdotes about New York real estate aside, what is your (non-technical) definition of inflation?
What I think we’re seeing is the beginning of an era of two countervailing trends. Prices of anything subject to productivity gains (e.g., via IT or reduced labor inputs) will contribute to DEFLATION, whereas anything asset-based (Barry’s house, rooms at decent resorts, organic foods) will experience INFLATION. This begs the question: what constitutes a valid substitution in an age of abundance, and suggests there may be room for a metric like the old Cost of Living Well.
What I got from the speech is that inflation expectations are the most important factor or risk of inflation than actual inflation. Did I say that right?
I got the feeling that the measurment of inflation is still being examined, that the fed is still learning which metrics to weight more heavily, but that the psychology of fighting inflation is just as important as the action of rising rates to fight inflation.
In other words, if expectations are that inflation is rampant and out of control, corporate/private sector behavior will adjust and that in itself will aggravate the problem of inflatiion.
Did anyone else hear it like this?
PS: I especially like that first question which obviously was from a woman like 110 years old. Longest question ever! Even Big Ben wanted to start rolling his eyes.
XON –
There will be no cat food…it is imported…and yeah…there will be no more of that…
I still don’t understand why you are so upset with the Fed. Food and energy prices have gone up, not much else has. Is this because the Fed is printing too much money? And if so, do you think that the FOMC should raise the federal funds rate? If not, why are you so focused on “core” inflation?
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BR: Not much else has gone up? Medical costs (+15%!), Education, Insurance, Home prices (still way over the inflation rate for the past 5 years), Professional Services (docs, lawyers accountants), and Restaurants.
Cheaper: iPods, plasma screens, (and apparently, hashish).
Am I the only one who flashed to the scene from the Wizard of OZ…
“Ignore that man behind the curtain!”
” then a ONE TIME increase in food or energy prices should have little influence on inflation.”
I for one expect gasoline to higher each fill up, and each trip to the grocer to have higher prices. I don’t know what cave this guy is living in.
So what will be the excuses when gasoline is $4 a gallon? The head of Nestle’s said that ag inflation is going to cause food prices to rise the next 5 years. That is what I expect.
It is about manipulating data to create the appearance of controlled inflation while at the same time keeping Wall Street in a fat pool of cheap easy money.
It’s what I’ve been saying for the past year. The only way for the US to fix its current economic problems without a depression are to have moderately high inflation while maintaining low inflation expectations. It’s a way to cut real interest rates so that the debt load is manageable. It works wonderfully as long as you can convince your lenders that inflation is low. Once they stop believing you, it’s likely to blow up badly.
jkw
“Fed’s inflation-fighting credibility”
oxymoron of the year….
They have credibility??? I for one see them losing whatever shred they had left with the what you worry statement.
“we;re not worried about it so you don’t worry about it or we’ll have to show that we will continue to talk about it but it’s not something to worry about so don’t worry….OK?
Got that?
Ciao
MS
BTW I also think that article by Peters sort of sums up what is really wrong with expectations….rate cuts??? what planet is he living on? obviously the one where Ben and Hank live on where nothing matters other than the price of Goldman Sachs and canandian bonds.
Ciao
MS
Barry,
I think you’re a bit off track here.
Bernanke and company are not saying that the price level or inflation is determined by solely by expectations.
We all except that in the long-run the average price level is determined by the quantity of money.
The question is what happens in the short run. What happens when the FED actually changes its rate target, etc.
If the FED has little credibility and if people expect inflation to persist then the FED has to hit them over the head with a recession to change their minds.
In other words a low credibility FED is forced into the trap of overshooting, what it wants.
On the other hand a high credibility FED simply has to say: We will not cut rates until inflation goes down. People will believe the FED and they will start to change their pricing behavior in response.
On the issue of Food and Energy. If you believe that food and energy prices are being driven up by soft monetary policy and not supply side shifts then are you willing to make the following bet.
If the Funds rate does not rise above X over the next 5 years then the price of food and energy will continue to grow at at least Y.
If as you say the Fed is now the low price cheerleader, then perhaps the Fed has an official interest in promoting the offshoring of manufacturing in order to keep store shelf prices low and in exporting high paying jobs and replacing them with lower paying service jobs (again to keep the aggregate hourly wages figure low).
Those two techniques being a means for masking high domestic inflation, then the offshoring of jobs and manufacturing can be seen as a symptom and evidence of inflation.
Prices do not increase, your money buys less. How do you think we got rid of the gigamongous debt from WWII? My grandpapy still had 3.5% yielding war bonds in 1965. Many do not recall the wealth transfer to OPEC in the 1970’s when the big worry was recycling petrodollars. Stagflation is back. Same toon, second verse. Inflation is immoral. It is theft by stealth
OT: Bob Pesanni just made me hurl…. Sorry guys….
Raising rates is not going to lower the price of food or the price of oil. Therefore, their prices should be excluded from consideration when trying to decide fiscal policy. Core inflation measurements allow them to do that.
The FED Chairman lied his ass off to the whole world yesterday. 30 years ago he would have been tarred and feathered for his comments, but in todays bizzaro world, his comments are taken as truth. INFLATION is the oversupply of money stock and/or credit. Too many dollars chasing too few goods.
It seems that the sheeple are being lied to by everyone in authority to keep the flying pig from turning into the slaughtered hog.
studies have shown that core rates over time are more reflective of inflationary trends than rates which include more volatile imputs. Alan Waxspan.
that said, I wouldn’t keep any fiat frogskins in the bank. Buy hard assets, land, oil and gold.
Zaćmienie bankierów
Jak donosi jeden z moich ulubionych blogów zza Oceanu The Big Picture Ben Bernake stwierdził, że poza
eddie-
That is not the point of fiscal policy…the point is that it should’nt take a wheel barrow full of dollars to buy that food and energy. On the present course it’s looking likely that we will still be paying the same amount however the dollars that we use will buy less of it.
http://stockcharts.com/h-sc/ui?s=$USD&p=D&yr=0&mn=3&dy=0&id=p90019734310
Sort of Econ 101……
Ciao
MS
Ross, thanks for the morning laughs!
Previous low on the dollar index was 80.48… currently trading @ 80.45…..
Perhaps I’m wrong but, isn’t a weak dollar inflationary…? Isn’t the market making a demand on the Fed…?
Talk is cheap Mr. Bernake….
Best Regards,
Econolicious
Barry,
I’m still stuck on the fundamental issue of what it is you want to measure. In your comment above, you choose a couple of particularly bad examples. Health care and college education are moving targets–while our wallets don’t know the difference, it’s hard to say our dollar is buying the same product it did a decade ago. You cite doctors fees, but my impression is that doctors’ salaries are at least flattening if not headed down. In any event, once you start talking about professional services, which are compensation-driven, you have to take a position on overall wage growth throughout the economy. As to restaurants, the price increases are either directly driven by commodity shortages (Mickey D’s) or by Gilded Age effects (Daniel).
Next time you’re in Philly, a wiz wit at Geno’s might give you a different perspective. Go easy on the hashish or you might want two.
JF
What is left?
We won’t measure food or energy (non core).
Not Housing, not health care, not education costs, not insurance.
Not travel, because, well, thats too energy dependent. Dining out is too food dependent.
Hey, guess what? All those exclusions just eliminated well over 75% of my annual spending.
What’s left? Entertainment (Books, Movies, Music, etc.), technology (iPods/iPhones, Plasma screens, etc). And these items go down due to economies of manufacturing scale — not de/inflation.
but i think he’s trying to tell us something: that no matter what the obvious facts are in front of our faces, he will either leave rates unchanged or actually lower them. after all, we’re heading into a presidential election, and the only thing the Republicans have going for them right now is the fact that S&P has retraced its losses. Greenspan raised rates in the face of Gore’s race, and Bernanke will lower them as the Republicans try to keep the seat.
Our economy is an apparition now without industry. It has been since we sold our soul to the emerging markets.
* 1. Denial and Isolation.
* 2. Anger.
* 3. Bargaining.
* 4. Depression.
* 5. Acceptance.
We are only in stage 1 folks.
scorpio:
If that’s the case, the markets will adjust to his recalcitrance. In other words, he will have surrendered his authority. Not a good message to send to the planet….
Econolicious
Anyone claiming there’s no inflation is not out and about buying stuff. I live in a NY co-op, and the cost of everything in our budget is up – this is not a reflection of NY RE market, but the cost of running the building. Not only energy, but common costs of maintaining the building: labor, cleaning services, RE taxes, insurance (we’re below 14th St.), you name it.
And, at the country place up in northern Dutchess, it’s more of the same: hardware knick-knacks, landscape, insurance, taxes, even the local fruit and veggies (from the farmers’ market).
I’ve compared my “core” COL from 5 years ago to today, and except for the price of my new 40″ LCD, nearly everything is up.
So, Ben is right – if he can keep the volk from thinking there’s inflation, he can keep them barefoot and pregnant. Once more it’s the oligarchy speaking and the lumpen sweltering to make ends meet.
And, BR, thanks for the first and probably best laugh of the day.
Not everybody on Wall Street is buying what Benny & The Jets is selling:
NBR Transcript
.
Barry, you run a business, right? You have employees, some hourly perhaps like a receptionist, some salaried, some on incentives comp.
Here is my question.
Do you, as a businessman, feel pressure to provide inflation adjusted wage hikes to your employees?
Bernanke is saying you don’t have to cause your not under any pressure to. Is he right?
Bernanke is saying, I think, that any wage hikes you provide are driven by competition for employees and justified by productivity gains and that inflation does not provide any role in the matter. What do you say?
In other words in order to maintain an employee who could get paid more somewhere do you just match the compensation or do you match it and then adjust it upwards for inflation as well?
Same for bonuses? After calculating the bonus do you adjust it upwards for inflation?
I said it when Bernanke was appointed, and I’ll say it again:
“Fed chairmanship is no place for a guy with a beard.”
He’s a dove, plain and simple. Funny he should speak of “anchored inflation expectations”…as he’ll likely go down in history as the one allowing those expectations to become untethered!
He’s a silly, silly man if he thinks his “jawboning” is being taken seriously.
There is an underestimation of the power of PhD behind a name, as well. I know of few PhDs who can seriously question the validity of their own beliefs.
me: “… then a ONE TIME increase in food or energy prices should have little influence on inflation.”
I’m sure the chairman misspoke or the stenographer left out a few critical words:
“… a ONE TIME PER WEEK increase in food or energy prices …”
(by appearances anyway)
John F.: re. doctors, professional fees —
Doctor’s fees include charges for medical equipment/materials, insurance, etc. In general, all “professional” and other service providers are passing through whatever costs of business to the extent their services are non-discretionary and they can get away with it.
If your cost of servicing an (aggregate) customer go up $10, and the customer (again in the aggregate) cannot easily substitute away from your service, would you charge them $10 more or “eat it”?
Barry: (food, energy, etc.)
“What’s left? Entertainment (Books, Movies, Music, etc.), technology (iPods/iPhones, Plasma screens, etc). And these items go down due to economies of manufacturing scale — not de/inflation.”
I disagree ever so slightly. Their price goes down, and “economies of scale” happen as well as supply-side cost and schedule pressures work their way up (down?) the chain because those goods are discretionary, and if the price is too high nobody is gonna buy them (or “upgrade” to the next revision for that matter)!
(Yours truly works in a business catering to consumer product makers, so I see these various pressures first hand.)
Barry, pay close attention to Karl Smith’s remarks.
“The question is what happens in the short run. What happens when the FED actually changes its rate target, etc.”
Bernanke just had the opportunity to tell the public that it’s not a matter of whether or not inflation is deteriorating our buying power or not. It’s simply whether or not we, the general holders of the U.S. currency understand that.
It’s no coincidence that interest rates were rising in tandem with gold. Gold is the people’s way of saying “We don’t like what we see”.
What it comes down to is not economics, but fundamental psychology.
Fed Rule #1 – Don’t Let Them Panic!
“It’s no coincidence that interest rates were rising in tandem with gold. Gold is the people’s way of saying “We don’t like what we see”.”
And it is no coincidence that the price of gold has been stubbornly high for at least a year.
Richard Daughty summarized Bernanke’s comments this way: “This brings up the latest Bernanke speech, which was not about inflation (as advertised), but about ‘determinants and effects of inflation expectations.’
….It was instructive when he said that the Fed does not pay any attention to the money supply because it is only interested in inflation in the short run.
….It was startling, then, when he subsequently admitted that there is a very, VERY strong relationship between inflation in the money supply and inflation in prices over the longer term!
…explosive growth in the money supply has been raging for decades, and is even now growing at over 13% a year! And still rising!!!”
I realized that we had no useful terms to describe this view of battling inflation with expectations nor the inflation to come from this growth in money supply. So I thought this void should be filled and humbly submit the following terms for approval:
Viewdoo Economics: a religious-like belief in a witch’s brew made of bat’s wings and bullshit that causes lowered perceptions and expectations of inflation to actually have an effect on real inflation.
Gestflationary period: the amount of time between the increase in money supply until goods’ prices begin to increase.
Emanciflation Proclamation: a tri-monthly utterance of the Federal Reserve Board that inflation is contained, excluding higher priced stuff, of course.
Jubliflation: the market’s response to the Emaciflation Proclamation.
Conflagraflation: widespead, prolific, and unstoppable inflation caused when viewdoo economics fails.
What I can not understand about inflation expectations is the practical way it is estimated. One definitely can not follow the methodology referred below. Moreover, one faces not one aggregate price but a huge number of actual prices for real good and services and also a diversity of goods and services to come in future. How can I predict the change in price of something which does not exist? For example, how can I evaluate the price of a PC in 1977 sitting in 1975? This process of innovation only accelerates over time.
So, the expectation of, say, 3% inflation during the next 12 months – where does I get it from?
Do I really aggregate all prices of all goods and services I use? (When my personal inflation depends on my income, i.e. what is the portion of my income I spend on fuel and food?)
Or somebody tells me that the last year (aggregate) inflation was 3% and this rate will stay during the next year. Who is this guy? Definitely he is not the guy who raises actual prices for food and gas.
Therefore, I am afraid that this is just a double trick – the Fed convinces us to convince it that there are some expectations of aggregated future prices. But actual prices are not limited by any expectations – they are just a result of real aconomic activity, where everybody gets s/he is able to get, and the price increase is a very powerful tool in this battle.
1. A Guide to the National Income and Product Accounts of the United States
http://www.bea.gov/national/pdf/nipaguid.pdf
2. Updated Summary of NIPA Methodologies
http://www.bea.gov/scb/pdf/2006/11November/1106_nipa_method.pdf
3. Chapter 17.The Consumer Price Index (Updated 06/2007)
http://www.bls.gov/opub/hom/pdf/homch17.pdf
Excellent article. YourManagement has become a part and parcel of everyday life, be it at home, in the office or factory and in Government. In all organizations, where a group of human beings assemble for a common purpose irrespective of caste, creed, and religion, management principles come into play through the management of resources, finance and planning, priorities, policies and practice. Management is a systematic way of carrying out activities in any field of human effort. Management need to focus more on leadership skills, e.g., establishing vision and goals, communicating the vision and goals, and guiding others to accomplish them. It also assert that leadership must be more facilitative, participative and empowering in how visions and goals are established and carried out. Some people assert that this really isn’t a change in the management functions, rather it’s re-emphasizing certain aspects of management