Power & Market

Maculate Disinflation

Stock markets tumbled this morning when the January Consumer Price Index (CPI) data came in hotter than expected. If you are wondering what the connection could be, the answer is that higher-than-expected price inflation means a longer-than-expected wait for the Fed to cut its interest rate target. It’s clear that financial markets are addicted to artificially low interest rates when any hint of a delay in rate cuts pushes stock prices off a ledge. Even news that most would consider good, like quarterly GDP growth and official unemployment rate data staying below 4%, can sour markets because of their implications for monetary policy.

The CPI release shows that “Team Transitory” ran its victory laps before the race was over. Paul Krugman has been declaring victory for over a year, with headlines like these:

  • Goodbye, Inflation: The latest numbers show that it’s yesterday’s problem.
  • The Soft Landing Is Happening: Why the new inflation numbers contain some very good news.
  • Why Did So Many Economists Get Disinflation Wrong?
  • Inflation Is Down, Disinflation Denial Is Soaring
  • None Dare Call It Victory: Has the war on inflation already been won?
  • How (Many) Economists Missed the Big Disinflation: The fault lay not in the models, but in themselves
  • Everything’s Coming Up Soft Landing: Inflation seems to be fading without a recession
  • Wonking Out: From Stagflation to ‘Immaculate Disinflation’

Meanwhile, monthly CPI data hasn’t reached the Fed’s 2 percent target.

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FRED graph CPI
Source: U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items in U.S. City Average [CPIAUCSL] and Consumer Price Index for All Urban Consumers: All Items Less Food and Energy in U.S. City Average [CPILFESL], retrieved from FRED, Federal Reserve Bank of St. Louis.

Annualized monthly rates over the past few months also show that Krugman’s “Immaculate Disinflation” isn’t materializing.

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FRED graph annualized monthly CPI
Source: U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items in U.S. City Average [CPIAUCSL] and Consumer Price Index for All Urban Consumers: All Items Less Food and Energy in U.S. City Average [CPILFESL], retrieved from FRED, Federal Reserve Bank of St. Louis.

Krugman was widely ridiculed for using tortured price inflation statistics that remove food, energy, shelter, and used cars to help him make the claim that the economic picture is better than surveys of economic sentiment suggest.

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Krugman Price Index

This prompted me to construct the “Anti-Krugman Price Index,” which only includes the items he excludes. When we compare the AKPI to average earnings, we see why he wants to ignore these components.

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FRED graph AKPI
Source: U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Food in U.S. City Average [CPIUFDSL], Consumer Price Index for All Urban Consumers: Energy in U.S. City Average [CPIENGSL], Consumer Price Index for All Urban Consumers: Shelter in U.S. City Average [CUSR0000SAH1], Consumer Price Index for All Urban Consumers: Used Cars and Trucks in U.S. City Average [CUSR0000SETA02], and Average Weekly Earnings of All Employees, Total Private [CES0500000011], retrieved from FRED, Federal Reserve Bank of St. Louis.

The prices of these items, as measured by their corresponding CPI components, have risen twice as much as average earnings since 2020.

The moral of the story is that court intellectuals will weave a narrative that supports the State, using whatever (manipulated) statistics will help them tell their tales. Krugman especially wants to tell the story that under Biden’s lucid leadership, the economy is doing great and the government (with help from the Fed) can simply turn the dials to steer the economy toward stability and growth without any negative repercussions.

Of course, this is a farce. Printing money and manipulating interest rates have many consequences, and the full costs are yet to be realized.

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