Friday’s inflation data put the last bit of icing on the quantitative-easing cake.
Released on October 15, the CPI, the consumer price index, showed inflation slowing to just 0.1% in September after prices rose by 0.3% in August.Â
The core CPI, which subtracts volatile energy and food prices, was unchanged for the month. The September number brought year-to-year core inflation down to just 0.8%. That’s the lowest annual rate of core inflation since 1961. The Fed’s target rate of core inflation is 2% to 2.5%.
That cements the case argued by chairman Ben Bernanke and a majority of the Federal Reserve’s governors that not only should short-term interest rates stay at 0% to 0.25% for an extended period, but also that the Fed should resume buying billions of Treasury notes in order to drive down long-term interest rates, stimulate the U.S. economy, and head off the possibility of deflation.
The size of the drop in inflation came as a surprise to economists who, according to Briefing.com, were expecting a 0.2% increase in the CPI and a 0.1% increase in the core rate for September. That forecast was seemed eminently sensible after prices at the producer level (the Producer Price Index or PPI) rose by 0.4% in September. Food prices in that index climbed by 1.2%.
But the increase in wholesale prices didn’t feed through to consumers as it usually does. At the consumer level that 1.2% increase in wholesale food costs, for example, turned into a much smaller 0.3% increase.
That’s a sign of exactly how slow the U.S. economy is. Companies aren’t passing through the full extent of rising costs to their customers because they’re afraid higher prices will keep them from buying at all. That lack of pricing power in the economy would be one more piece of evidence in favor of quantitative easing—if the Fed needed more evidence in favor of that decision.
But I think that cake is cooked.
Stumpy,
Hope you don’t own B of A…..
Hi Again,
I agree that our demographics aren’t as bad as Japan (and a lot of Europe). I am not completely positive that our politics are any better. The Japanese system of pumping billions of yen into rural areas isn’t really that much different than our own system of subsidies for darned near everything, (except actually working), and then you can add that only half of us actually PAYING for those subsidies.
It seems to me as a chemist, that the thermodynamic principle of money (you cannot consume more than you produce) is being held at bay at a soon to be paid terrible cost. Holding back entropy, in the long term sense, is a futile quest. As a country we have gone for too long, consuming too much, and producing too few actual goods that others want.
I think Angela Merkel said it best- “we make things”. Until we begin to see the light, accept the pain that we are due, and begin to change our ways, I just see more QE as kicking the can down the road. Unfortunately, that can is getting heavier and heavier, and each massive kick is moving it a little less each time. Eventually we will find that we have been kicking our can down a blind alley…
Stumpy-1
Stumpy, actually I can think of a lot of ways we’re not like Japan. Our demographics aren’t nearly as extreme. U.S. is the youngest of the developed economies. Our politics aren’t nearly as fouled up–I know that’s hard to believe–but the Japanese system of pumping billions into rural areas to keep them voting for the Liberal Democrats pretty much undermined every effort at stimulus.
Well…….
I think Jim, Barney Frank, Paul Krugman and others (including, to be fair, many Republicans) would say Regulation and prudent Gov. “stimulus” policy.
Don’t count me in that camp since, the 1 time in history Michael Moore and other “super government types” were correct (2008), They’ve managed to pass NO meaningful regulation or punishment to those that helped caused this. In fact, just the opposite, The Big Banks are institutionalized from failure and pay bonuses as they see fit.
But at least they fixed Fannie/Freddie!
So, as I suspected, we are not different from Japan in any material way, except we cannot carry our own debt internally.
So I guess I have a third question; How does this NOT end badly?
Stumpy-1
Stumpy,
Not that I’m smarter than you but we’re different from Japan in at least one LARGE way. We don’t have trillions in private savings as they did 20 years ago.
On a happier note, we’ve got about a 1 in 10 chance of Mortgage Lending ceasing in the next 2 weeks. Evidently, there are still some cynics left who would like to be paid back when they lend someone money. How old-fashioned, I know.
Two questions for those that are much smarter than me.
1. How does moving money from your left pocket to your right pocket REALLY accomplish anything?
2. We are different from the lost decade(s) in Japan how, exactly?
Stumpy-1
A month ago, I bought Jack Cheese at the grocery, for 2.29 a pound, 2 weeks later it was 2.49, then 2.59, last Sunday it was 2.69…
Take a look at commodities…
Take a look at XLE energy…..
No inflation, yup, if you don’t use energy, and do not eat.
Now the FED is ready to print again to stimulate the economy… And all that it will stimulate is the big players who get the money, will dump it into the stock market , and commodities to save it from inflation, and I will see the price of cheese go up .. and the economy will go nowhere… if anything, the economy will slow as stagnant wages do not keep pace with commodity inflation.