Tuesday, January 13, 2015

Inflation??? What inflation???

An Historical Look at Price Inflation and the Future Price Inflation Prognosis
By Robert Wenzel

Most members and staff economists of the Federal Reserve Open Market Committee, the body that sets monetary policy, appear to be working under the assumption that because price inflation at the present time is, as measured by government statistics, under 2% that this trend is likely to continue.

From the minutes released of the December 16-17, 2014 FOMC meeting:

The staff's forecast for inflation in the near term was revised down to reflect the further large energy price declines since the October FOMC meeting, which were anticipated to lead to a temporary decrease in the total PCE price index late this year and early next year. The staff's inflation projection for the next few years was essentially unchanged; the staff continued to project that inflation would move up gradually toward, but run somewhat below, the Committee's longer-run objective of 2 percent.
It is difficult to understand what the Fed is basing this on other than simply projecting out the current trend. How sound of a method is this? One need only look at the 1960s and 1970s to understand the problems with this type of projection.

From 1960 to 1965, prices climbed at an annual rate below 2.0 percent Starting the period with a climb of only 1.4 percent in 1960. By 1969 the inflation rate was at 5.9 percent and by 1979 it hit 13.3 percent...

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