It seems the Fed has forgotten, once again, that inflation is a monetary phenomenon!

And so is disinflation…

With the results for the PCE deflator out we get the headline: “U.S. Inflation Undershoots Fed’s 2% Target For 33rd Straight Month”! The chart from the day the Fed made the 2% target official:

PCE Jan 15

The arguments the Fed uses today echo those of 40 years ago, only this time with inflation “below the line”:

Back in the 1970s, inflation was due to oil prices, Unions and Oligopolies. If I read Yellen correctly, she thinks, lower than target inflation is due to oil, import prices and second round effects of oil!

Fed Chairwoman Janet Yellen last week told lawmakers that “recent softness” in inflation largely reflects the plunge in oil prices since mid-2014. Prices for energy goods and services tumbled 10.4% in January from the prior month and were down 21.2% from a year earlier, according to Monday’s report.

Ms. Yellen acknowledged slower growth in nonenergy prices as well, which she said partly reflects “declines in the prices of many imported items” and “perhaps also some pass-through of lower energy costs into core consumer prices.”

In “Lessons from the Great Inflation”, Robert Hetzel writes:

[T]his common understanding of the nature of the Phillips curve and activist policy rested on two basic assumptions.

First, inflation is a nonmonetary phenomenon. That is, inflation springs from a variety of real factors rather than from the failure of the central bank to control money creation.

[T]he second basic assumption was that policymakers understood the structure of the real economy sufficiently well to pursue an unemployment objective.

The French are correct: “Plus ça change, plus ça reste le même c’est pareil”!


2 thoughts on “It seems the Fed has forgotten, once again, that inflation is a monetary phenomenon!

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