The Fed’s Views On Inflation Don’t Match Those Of U.S. Consumers

One of the Fed’s stated goals for its additional round of monetary easing is to create some inflation, in an effort to help inflate the economy out of its doldrums. The Fed says it has plenty of room to move without worrying that its easy money policies will create inflationary problems down the road.

But does it really?

It was reported this morning that the Producer Price Index, measuring inflation at the producer level, rose 0.8% in November, its biggest gain since March. The increase was mostly due to a 2.1% increase in energy costs, including a 4.7% increase in the cost of gasoline, and rising food prices, including a 13.6% increase in the price of fresh fruit and melons.

Over the past year the Producer Price Index is up 3.5%, which seems to already be above the Fed’s stated comfort zone of 2%.

But no problem. The Fed doesn’t go by the overall rate of inflation. It goes by the ‘core rate,’ which is with  the cost of food and energy removed from the calculations. Food and energy costs are just so volatile. And the core rate rose only 0.3% in November, mostly due to increases in auto prices. And over the last year the core rate is up only 1.2%, well under the Fed’s comfort zone of 2%.

By the way, maybe they should also remove the cost of automobiles from the calculations. Their prices also seem to be so volatile, falling some months when dealers are overstocked and demand is low, and rising some months, especially when new models come out.

But anyway, with the core rate at only 1.2% over the last year, well under the Fed’s comfort zone of 2%, inflation obviously remains benign and it should not negatively affect the economy if the Fed creates more.

All that’s necessary is for consumers to adjust their comfort zones. They need to realise that the cost of food and energy is immaterial. So what if rising food prices, and the higher cost of heating oil and gasoline is taking money out of their pockets they’d rather spend elsewhere. So what if much of that money is going to oil-exporting countries. So what if increasing amounts of our food, particularly fruit and fish, are being imported from other countries.

If consumers would simply adjust their comfort zones to match the Fed’s, realising that food and energy costs, and where the money goes, is unimportant to the U.S. economy, we can spend our way out of this dang problem.

Above all, don’t pay attention to commodity prices. If the Fed says inflation is benign, then inflation must be benign.