The inflation hawks have come up with a convoluted explanation for why the market doesn’t seem to be indicating looming hyper-inflation—they’re saying investors think the government will fudge the CPI to under-report inflation.
The case that we’re hurtling towards Zimbabwe style hyper-inflation is tough to make in light of the official statistics. Prices have fallen two per cent over the past year, and the Consumer Price Index fell again in July. Whatever theoretical price inflation might be coming due to stimulus spending the growth of the monetary base doesn’t seem to be on the verge of becoming reality.
Perhaps more damaging to the inflation hawk case is the price of inflation indexed bonds. The prices have remained low, which should be an indicator that investors are not looking for shelter from inflation. Anyone who thinks the market is efficiently pricing the information about our fiscal and monetary policies should conclude that inflation is a ways off.
Except that’s not what some inflation hawks are concluding. Instead they are saying that investors are shying away from the government’s inflation indexed bonds because investors fear the government will “fix” the inflation numbers to avoid paying out on the bonds. The idea is that inflation would make these bonds costly for the government—creating an incentive for the government to fudge the official numbers.
This seems a far-fetched possibility. It is true that issuing inflation protected bonds makes inflation costlier for the government than it would be otherwise. But the idea that the government could get the bureaucrat economists to secretly fudge the CPI over-estimates the ability of the government to manage it’s people
Think about it. This is the same government that arranged for a “training exercise” on the Potomac River on the anniversary of the 9/11 terrorist attacks. The same government that admitted that Obama’s health care plans wouldn’t save any money. The same government that is busily second-guessing itself about the role it played in the merger of Merrill Lynch, with Congress and the courts fighting with the Treasury and the SEC.
Do you really believe these guys can secretly fudge the CPI so that TIPS don’t pay off? More importantly, do you really think investors thinks the government can pull this off? Do you really think that’s why investors aren’t bidding up TIPS?