“Where is the love?” I mean, inflation?

The Commerce Department released the PCE and PCE-Core measures of inflation for the month of January. Over the past 12 months ‘Headline’ measure clocked at 1.2% while the ‘Core’ measure was a split second faster, clocking in at 1.3%.

It appears the Fed is not doing its work, keeping inflation at 2%, which has acquired the same status as the “Golden Number” – 1.618!

It is said that the Fed´s ‘preferred’ measure is the ‘Headline’ PCE. If true, that´s a bad choice given it is much more volatile than the ‘Core” measure, which best defines the inflation ‘trend’.

The two indices are available since 1959. The chart shows that over this 53 year period the two indices are almost indistinguishable. Over that span of time the ‘Headline’ index has climbed by a factor of 6.4 while the ‘Core’ index increased by a factor of 6.2.

Where is the love_1

Looking at their 12 month percentage change since 2000, notice how wiggly (volatile) the ‘Headline’ measure is. Notice that while Greenspan kept ‘his cool’ when oil and commodity prices shot up in 2003-05, Bernanke ‘lost his nerve’ when oil prices jumped during his watch. Also, pay attention to the pattern of the Bernanke Fed actions, ‘QEing’ ‘On’ and ‘Off’ according to the moves of ‘Headline’ inflation. All the while the ‘Core’ PCE has remained well below the ‘Golden Number’.

And it seems people got ‘tired’ of getting excited about the Fed´s actions to get the economy going so that QE3 has not made a dent. Actually both measures of inflation have dropped a bit since!

Where is the love_2

But our august central bankers are ‘forward-looking’ and seem to think that inflation will be 2% just after the ‘next curve on the road’! They thought so too 2, 3 and 4 years ago.


One thought on ““Where is the love?” I mean, inflation?

  1. Egads, we are courting deflation, and we have not recovered pre-recession employment levels.

    The Fed is not run by lunatics, as Scott Sumner once suggested. It is run by sadistic lunatics.

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