How to go inflation shopping | Charts that Count

How to go inflation shopping | Charts that Count


So Stephen Moore, that’s
Donald Trump’s new nominee for the Federal Reserve
Board of Governors, has suggested in an
op-ed the Fed should target commodity prices when
it’s looking at inflation. Here’s what the Fed
targets right now. This is price changes in
core personal consumption expenditures. Personal consumption
expenditures, this is just a basket of all
the things that you buy – cell phone service,
cars – they’re weighted depending on
how much money you spend. And then you throw out some
stuff that’s really volatile: energy prices and
food prices, right? Those bounce all around. You want an accurate
measure, so you’re just looking at core prices that
people spend every month. That’s what the Fed is tracking. Here’s what Stephen
Moore wants to track. He wants to track the
price of commodities. This is mostly gas and
oil, energy products, but also metals –
steel, aluminium. The measure we’re
using here, there are lots of different
ways to measure it, but this is the
producer price index. This is what companies
pay for commodities. OK, why would you
want to do that? There are a ton of different
ways to measure inflation. I’m not going to go into
detail on all these. There are consumer surveys,
like the Michigan survey, that asks consumers what they
think inflation is going to be. There are market measures,
like the five-year, five-year forward. It looks at a complex
measure of Treasury prices, see what people think inflation
is going to be in the future. There is this measure, Trimmed
Mean PCE from the Dallas Fed. And then there’s the Median
CPI from the Cleveland Fed. They’re fascinating. We’ll talk about
them some other time. But there are different
ways to look at inflation. And the question is
always, if you’re arguing for a certain
kind of inflation, are you genuinely interested in
the best way to measure price change? Or are you… or are you inflation shopping? Basically, if you can argue
that inflation is really low, you can get the Fed
to be more aggressive, and accommodative, and
help the economy grow more. If you can argue that
inflation is high, then you can get
the Fed to back off. And at various times
over the last 10 years, you’ve heard different people
argue for different measures. So Stephen Moore, new nominee
to the governor’s board, is he arguing or is
he inflation shopping? OK, so let’s look at
what commodity prices do. In the early 80s, there
was some discussion about actually tracking
commodity prices for the Fed. The problem is they were already
pretty volatile back then. They move around a lot. They’re fantastically
volatile now. What’s going on? Political risk. Saudi Arabia makes decisions. Russia makes decisions. Venezuela makes decisions. The United States makes
decisions about Iran. There are a lot of things going
on in the price of oil that have nothing to do with
markets or inflation, and everything to
do with politics. The Fed can’t
control those things, so it’s hard to react
to those things. OK, the other problem
with tracking commodities is that it seems like
it’s a diversified basket. You’ve got metals. You’ve got
agricultural products. You’ve got energy. But mostly, it’s energy. It’s overrepresented. First of all, it’s
just a big part of what we spend our
commodity money on. The other thing is, other
commodity prices actually reflect the price of energy. When you’re looking
at aluminium, for example, it
takes a ton of energy to make aluminium, right? So the price of energy is
going to necessarily affect the price of aluminium. It’s overrepresented
in the entire basket. So if you want to
track commodities, what you are really tracking is gas. The other thing that’s happening
right now, particularly energy, is subject to what we’d
call a secular shift. This is a change
in technology that has nothing to do with
the underlying market. So right now,
fracking technology has changed the way we
extract natural gas and oil. That means when you get
periods like this, 2014, 2015, Saudi Arabia, American
frackers are competing to drive the price of oil down. That’s not really part of the
overall inflation picture. That’s volatility
in technology that has absolutely nothing
to do with the rest of the picture of inflation. So Francisco Blanch, he’s
a commodities analyst for Bank of America
Merrill Lynch, told me that another
problem with this measure is that not only is energy
becoming more volatile, it’s a smaller and smaller part
of the basket of what we buy. People are becoming
more energy efficient. That’s only going to
increase in the future. So you have a measure that
is subject to political risk. It’s mostly gasoline. It’s got these secular shifts
going on with technology. It is a smaller and more
volatile part of the things that we buy. And this is what Stephen
Moore wants to measure. Now, the Fed does
look at commodities, and in particular energy
prices, when it’s thinking about inflation more broadly. It’s one small part of
what they’re considering. They’ve said that in
their public statements. But this gives us a clue
to what Stephen Moore might be thinking. I don’t have a channel
into his brain. Energy prices in particular
are dragging down this broader commodities basket
to what you could technically call deflation. Prices are actually decreasing. What normally happens when
central banks see deflation is that they freak out. They’re very accommodating. They’ll do anything they can
to help the economy grow. So, given that energy prices, or
commodity prices, are volatile and growing even more
volatile, given the fact that it is a small
part of the basket, getting even smaller
of what we buy, given the fact that it’s
subject to political risk, given the fact that it’s
mostly gasoline, given the fact that there
are technological shifts, we have to decide. Is Stephen Moore
interested in the best way to measure inflation? Or is he inflation shopping?

One thought on “How to go inflation shopping | Charts that Count

  1. Let me see. Meaning some will be ruined. Darwin's selection rules working the best will survive. They will reduce their market and keep controlling it. Compensating from external market. It will increase considerably the exporting potential. Guess what the others will respond with protectionist measures. More welfare? Possible riots? I have no intention of giving the solution.

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