The Variation in Inflation Experience
Governor Lael Brainard gave an eloquently titled speech on April 5 called Variation in the Inflation Experiences of Households. The speech centers around the “heterogeneity of experienced inflation,” or the understanding that individuals experience currency debasement in a variety of ways. Not that a central banker would ever say it in such words, but she discusses limitations of quantitative economics, since no universal “truth” or objective valuation for something like the Consumer Price Index (CPI) can ever be derived. Nonetheless, she speaks to the concern of rising prices, promising that the Fed is:
…prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted. We are committed to bringing inflation back down to its 2 percent target…
The governor reiterated that easy money policies are over (for the time being), and that the central bank will:
…continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting.
It’s something we must see to believe. It would be significant if the Fed were to reduce asset holdings only 4 weeks from today. The process of shrinking the nearly $9 trillion balance sheet would more than send shockwaves throughout the economy. Often, euphemisms such as “tightening” or “shrinking” are used to describe returning hundreds of billions, or literally trillions of dollars back to the Fed. In her own words:
Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery…
One must wonder whether or not members of the Fed truly comprehend what will happen at said time. It’s not that the Fed has taken the position it will now do nothing; rather, it will now reverse accommodations they’ve previously given. If the Fed’s Magnanimous Monetary Touch was instrumental in the recovery, what happens when the Fed removes itself, and dollars, out of the system?
She didn’t delve into the after effects of the Fed’s tightening, nor how this may alter prices, valuations and decision making. But apparently central bankers are still trying to interpret inflation measurements and the damaging effects (price) inflation has on the most vulnerable members of society. As Arthur Burns, Fed Chair during the ‘70’s said, there is little doubt poor people are the “chief sufferers of inflation.”
Brainard speaks to the hardships price increases have on the general population and how inflation measurements underrepresent those with lower incomes:
Since lower-income households represent a relatively smaller share of overall expenditure, the inflation associated with their consumption baskets is underrepresented in the official consumer price indexes.
She discusses the need for inflation data on multiple demographic groups. Yet statistical agencies do not collect such data. After acknowledging various problems with their inflation calculations, the ultimate conclusion is that more research is needed:
We are only beginning to understand the ways in which inflation experiences vary from household to household, how this variation correlates with income and demographic information, and how these divergent inflation experiences change over time.
On the eve of what is promised to be the world’s greatest monetary tightening experiment of all time, it’s good to see the Fed contemplating century old topics and the impact currency debasement has on different individuals. It’s not comforting that it only took a hundred years nor that the Austrian approach still remains outside of the Fed’s contemplative sphere. If nothing else, there will be a huge range of emotion we’ll all be confronted with if (when) the balance sheet reduction does not go according to plan.