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Alan Reynolds' Defense of the Fed


Cato Institute senior fellow, Alan Reynolds, who writes pretty good columns on non-monetary issues but who writes terrible columns on monetary issues unfortunately chose to write about monetary issues today, attacking those who "second-guess" the Fed.

In a rather typical fashion for his monetary columns, he goes out of his way to mislead people when he tries to refute those who point out that even so-called core inflation (Setting aside for the moment the issue of the relevance of that concept, not to mention the issue of the justifiability from a libertarian perspective of central banking and inflation-targeting in the first place) have accelerated :"The Fed's critics make it sound as though the past three months have revealed an enormous spike in "core" inflation (excluding direct energy expenses and, unimportantly, food). On Aug. 2, a Wall Street Journal report said, "The price index for personal consumption expenditures excluding food and energy (PCE) ... rose 2.4 percent in June compared with a year earlier, matching the fastest annual rate since 1995." Comparing the second quarter to the first, that same core PCE index was said to have increased "at a 2.9 percent annual rate, the fastest pace in more than a decade."...

...In reality, the core PCE index rose at the same 0.2 percent pace in April, May and June, leaving only March "elevated" at 0.3 percent. Monthly increases also averaged 0.2 percent during the first quarter and during the last quarter of 2005."

But as surely Reynolds must know, the numbers he mentions are rounded. The actual increase was 0.225% in April (from 111.264 to 111.514), 0.23% in March (from 111.514 to 111.571), 0.24% in June (from 111.771 to 112.038). That's a 3 month increase of 0.7%, which means a annualized increase of 2.8%. Together with the 0.3% increase in March, this means a 4 month increase of 1%, or 3% at an annual rate.

This shows how Reynolds is flat out wrong when he claims that the reason for the acceleration in the 12 month increase is due to low increase 12 months earlier.

"The reason the year-to-year core PCE deflator appeared to increase from 2 percent to 2.4 percent over the past three months had nothing to do with faster inflation this year. It had to do with unusually slow inflation last summer — just 0.1 percent from June to August. That pulled the year-to-year figure down from 2.3 percent in November 2004 to as low as 2 percent for a while, and it made last summer a tough act to beat on any year-to-year comparison."

Here clearly Reynolds try to make people believe the uptick in the 12 month increase was the fact that the increase in June-August 2005 was so low, but in fact only June have been phased out from the 12 month number.

He later mentions the acceleration of unit labor costs but dissmisses this as a factor. But it's not just unit labor costs. For example, The Economist's commodity price index, which Reynolds thought was interesting during a brief period when it had fallen have risen some 28.5% in the 12 months to August 1st, while the dollar have fallen (which will reduce the downward pressure on prices from foreign competition) during the same period. It is therefore a pretty sure bet that consumer price inflation will continue to accelerate in the near future.

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