Everything DOWN, but inflation UP

And IF the Fed only cares about inflation, and avoiding deflation…we´re in a stalemate!

Scott Sumner has a post about “passivity” in the 1930´s and ends it on a “positive” note:

Thankfully we can learn from their mistakes.

I´m not so sure. And reading this David Glasner post makes me wonder “how stupid can you be”?

After administering a pro-forma slap on the wrist to Texas Governor Rick Perry for saying that it would be treasonous for Fed Chairman Bernanke to “print more money between now and the election,” The Wall Street Journal in today’s lead editorial heaps praise on the governor for taking a stand in favor of “sound money.”  First there was Governor Palin, and now comes Governor Perry to defend the cause of sound money against a Fed Chairman who, in the view of the Journal editorial page, is conducting a massive money-printing operation that is debasing the dollar.

And what about the RISE in inflation that was emphasized in the news today:

The inflation report comes amid mixed signals for the economy and worries about a weaker U.S. outlook. The Fed could be constrained from taking further stimulative action—such as buying more bonds to keep long-term borrowing rates low—if inflation measures stay above its informal target of close to 2%.

Let us look at the “face” of the so called “constraint”. From the Atlanta´s Fed Inflation Project, the figure below shows the headline CPI and it´s flexible and sticky components. The sticky component has the greater weight and works to “cushion” the high volatility of the flexible prices. Sticky price inflation is still way below what it was before the recession began in late 2007.

The picture below shows alternative measures of core CPI inflation. Again, they are far below the experience prior to 2008 and mostly below the “magical” 2% threshold.

And alternative measures of inflation expectations indicate they are on the way down! First the inflation expectation curve from the Cleveland Fed shows that with the end of QE2 the whole curve has shifted down.

And the 10 year inflation expectations using the TIIPS market has drpped steeply since the beginning of this month. The FOMC statement, indicating the possibility of another “round of monetary stimulus”, had a short “shelf live”, with today´s market outcomes enticing a large drop in inflation expectations.

The only “constraint” is the “stupid passivity” of those responsible, with the Fed on the very top of the list.

And the Economist writes the “epitaph”:

If the shortfall in GDP relative to trend in each year since 2007 is totted up, America has suffered a cumulative loss of $4 trillion, equivalent to a stunning $13,000 for each person. Stockmarkets and newspapers will cheer when growth rates eventually pick up, but most of the income that has been lost since the crisis began will never be recouped.

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