Joseph Carson, the former chief economist at Alliance Bernstein, warns that inflation is actually in the double digits if we go by 1970s price measurement methods — Jimmy Carter’s era.
“In May, the consumer price index (CPI) rose 0.6%, pushing the twelve-month increase to 5%, the most significant increase since 2008. Core CPI rose 0.7%, lifting the twelve-month increase to 3.8%, the largest increase in almost three decades,” Carson writes. It’s actually much worse as bad as this is.
Changes over the past several decades hide the real numbers.
Mr. Carson gives an example — “government statisticians now employ an arbitrary and non-market price for owner’s rent, removing actual housing prices from the calculation.”
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[Core inflation strips out food and energy because they’re volatile. Money policy is made on core inflation.]
“Significant tightening in monetary policy breaks inflation cycles. It took the Fed Chairs of Volcker and Greenspan an entire decade, lifting official rates far above inflation to break the 1970s inflation, and in 1994 it took Greenspan a full twelve months to suppress a potential cyclical jump in inflation.”
This creates some problems: “First, how can you use justify changing monetary policy for an inflation problem you say doesn’t exist? Second, if policymakers decide they need to raise real interest rates, what price measure do they use as a benchmark? Third, how does the Fed drive real interest rates higher when they own a third of the Treasury market.”
Inflation cycles end badly even when everyone knows there is a problem, Carson says.
The Feds are trying to say this is a transitory problem. Carson references the Carter era and how Federal Reserve Chair Arthur Burns said the same thing. He demanded food and energy prices be stripped out of the measure. It ended up with him continuing easy money policies. We all know how that turned out — stagflation.
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