The CPI headline measure hit annual 2.1% in May and the inflation nutters are going wild that the Fed hardly noticed. It shouldn’t have noticed because headline CPI is useful for… what I am not even sure. I don’t find it particularly useful for much of anything related to macro and here’s why:
1) It’s insane.
2) It doesn’t allow substitutions. It assumes we all keep buying the same things regardless of price. We switch from name brands to store brands. We buy ground beef instead of steaks, or perhaps chicken or pork when the price of beef goes through the roof. The CPI assumes you continue to buy steak. Maybe it is useful if we want to know if the price of steak that nobody is buying is rising??
3) It’s insane.
4) It’s insane.
Oh, and did I mention it’s insane?
The Personal Consumption Expenditures Core Price Index annual rate for May is 1.4%. In April, it was 1.4%. It averaged 1.2% throughout most of the Great Recession and has hardly budged after 19 months of QE.
The difference between the two measures is basically food and energy. And since gas prices haven’t changed that much that I have noticed, it must be the drought driving up the price of food, including beef and the steak that nobody is buying. It’s called a supply shock, and it happens when something happens on the supply side that impacts the price of something. You know, persistent drought = expensive food because there isn’t as much as there generally is with the same or growing demand.
Now, if the Fed works on the demand side and we have something happening on the supply side, the Fed should ignore the increase because it can do nothing about rising food prices – zero, zilch, nada. And I love explaining why it can do nothing about rising food prices due to drought except perhaps in the very short run. It’s my favorite rant against inflation nutterism because it zeros in on exactly why the entire idea of targeting headline inflation is absolutely and unequivocally morally bankrupt.
There are so many people alive today in the US and they all need to eat a certain amount of calories per day of various kinds of foods in order to maintain proper nutrition. There is some base demand for food for each given day. Suppose the Fed then tightens monetary policy in response to runaway food prices due to drought and the usual effects happen. Some people can’t find a chair as the music stops. They lose their shirts on the stock market or they lose their jobs because of the demand deficit. But you know, a really funny thing happens. They wake up in the morning and, though financially bankrupt, their stomachs are growling. The same thing happens at lunch, and at dinner, and each time they eat. Yes, indeed. They eat.
Suppose this tight money goes on for a while. The higher food prices go, the tighter it gets. There’s a lot of slack in the labor market from the demand deficit and they haven’t found jobs at the end of their money; so they start selling belongings to buy groceries. We all have that basic human need called hunger to meet in order to survive. After some more time has passed they run out of belongings and apply for foodstamps so they can buy groceries. They are still eating; and they are still eating after all of the losses – income, belongings, home, and even once they are living out of cardboard boxes. And food prices are still on the rise – because there is only so much food that can be produced and the population continues to eat regardless of loss of income. Perhaps the inflation nutters might find some diabolical plan to ensure those who can’t find a chair don’t continue to eat – like perhaps cutting foodstamps and shuttering soup kitchens because they are just too civil to reduce the demand for food humanely?
Of course there is no way to reduce the demand for food that qualifies as humane or civil – and that is entirely my point. The use of monetary policy to do it is absolute cruelty tantamount to causing mass starvation with a demand deficit and the other way without the use of monetary policy is utterly unthinkable. And what have been people been saying about microfoundations? Not that I put much weight on it – but for some things it is quite useful illustrative purposes.
I cringe every time I hear someone complaining about the Fed because the price of food is skyrocketing. They can’t possibly understand what it is they are implying or they wouldn’t say it.