Friday, June 22, 2012

Lacker says monetary policy won't spur faster growth without inflation

In a lone dissent from the Federal Open Market Committee's decision this week to extend its long-term Treasury buying program, Federal Reserve Bank of Richmond President Jeffrey Lacker said he doesn't think the program will help spur the economy to more growth and is concerned about higher inflation.

"I do not believe that further monetary stimulus would make a substantial difference for economic growth and employment without increasing inflation by more than would be desirable," he said in a statement released Friday.

He said the inflation rate is currently near the target of 2 percent. The Fed also published this week updated economic forecasts that revise downward 2012 growth predictions, but Lacker said "the impediments to stronger growth appear to be beyond the capacity of monetary policy to offset."

The Richmond Fed covers the Carolinas, Virginia, West Virginia and Maryland.


Garth Vader said...

Just curious Mr. Dunn,

How do you personally define "inflation"? Via CPI, via money supply, or some other way?

Anonymous said...

Garth, I generally look at CPI less food and energy. For the purposes of this blog post, however, the 2 percent figure I cite is from the Federal Reserve.

The latest 12-month data from the BLS on CPI less food and energy put the inflation rate at 2.3 percent.

Anonymous said...

Precisely why I'm so fond of Shadowstats.

When the truth hurts...

Garth Vader said...

Thanks for the reply. Unfortunately "CPI less food and energy" is the most inaccurate inflation measurement out there. 23.8% of CPI weighting is "owner's equivalent rent", which is a housing figure arrived out via hypothetical guesswork ("if you were to rent out your house how much would you charge for it?").

The housing collapse - a result of a bubble created by the Fed and the banking system - is now masking the true impact of inflation, since CPI is so heavily weighted to a (flawed) housing component.

Consider too that people don't seek a change in housing often (both renters and owners stay in the same place for years at a time) so housing isn't really a "consumer" good and therefore should not be part of the Consumer Price Index.

By contrast, food and energy ARE consumer goods, in fact they are the first items people think of when they notice that their paychecks don't go as far as they used to.

Other tricks used to mask true inflation include hedonics (same word root as "hedonism" - it allows the substitution of, for example, ground beef for sirloin steak in the calculation of food costs) and technology advances (at the BLS tries to argue that a replacing a $250 CRT television with a $1250 LCD is somehow DEflationary).

I think you would be better served by watching both the growth in the money supply and in the prices of those goods and services whose production and delivery methods have changed little (stamps, gold, wheat) as far more accurate indicators of inflation.

Anonymous said...

Garth, you make some good points. Thank you.

Unknown said...

Garth is right. There's a good video presentation by Ed Butowsky with Fox Business' Varney & Company that proves the Consumer Price Index is an incorrect representation of reality.