Crazy Talk: Raising rates while Inflation is near 70 year lows

I do not get it. I do not understand why there is any talk of raising rates at all. Inflation isn’t just low, it’s freakishly low.

Inflation is extremely low - there is no other honest way to think about the inflation level.
Inflation is extremely low – there is no other honest way to think about the inflation level.

Look at this chart, which goes back nearly 70 years:

 

This chart goes back to January of 1947. The chart covers 68 1/2 years of U.S. inflation.

Where are we relative to the last 70 years? Inflation as measured by CPI has only been lower 4 times. Once quite recently, after the crisis, and the data says we are diving again.

Some people say core inflation is accelerating. This is crazy, but lets see what they say:

“This leaves the Fed with less scope to delay raising rates until it sees more evidence of a rebound in real activity,” said Paul Ashworth, chief economist at Capital Economics in Toronto.

“September is still the most likely (rate) lift-off date, but July is not out of the question, particularly not if we get another couple of robust rises in core consumer prices in May and June,” he said.”

Honestly, this is crazy talk. We should be saying to this person “You are talking crazy talk” , and not quoting them in an CNBC article. Less scope to delay raising rates? Robust rises in core consumer prices? These sentences do not make any sense when confronted with the data.

Screen Shot 2015-07-24 at 11.54.23 AMHere is a chart of the percent changes since the last month in CPI. You know what this looks like to me? Noise around 0.2%

We’ve had some months where we hit 0.6%! Did we see 7.2% inflation for the year? No.

How about that terrifying, multi-month “trend” in 2011? How did that pan out? It ended up being nothing at all.

There is simply not a credible, data driven case for hiking rates in September. Talking about raising rates is…crazy talk.

 

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Beowulf
1 year 9 months ago

Martine Guerre-like, I have returned (and yes my dog recognized me)…
I’ve been thinking lately that Congress should go ahead and pass a law locking in rates. They could always vote to raise them in the future but in the meantime this rate freeze would create a new CBO budget estimate baseline with lower net interest spending projections (and a future rate hike vote would have to be “paid for” with either budget cuts or tax hikes). If Congress also limited Tsy from only issuing T-bills (abolish T-note, T-bond authorities, at the same time it abolished debt ceiling ideally), this would amp up the savings in net interest spending even more. How much more? CBO projects $5.5 trillion in net interest spending in next 10 years (2016 – 2025). That would essentially disappear as existing T-notes and T-bonds are either called in or expire. The Fed would have to use other monetary tools to take away the punch bowl when the economy overheated but in the meantime there’s $5T in found money that the two parties can fight over (new spending, tax cuts or both).

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