Submitted by John Mauldin – Mauldin Economics
“Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.”
– Ronald Reagan
“To me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target.”
– Janet Yellen
The US economy grew at a 1.5% inflation-adjusted rate in the third quarter, or so said the Bureau of Economic Analysis in its first GDP estimate last week. The number is subject to revision and will probably change. Based on recent experience, revisions could easily push it below 1% or above 2%. Since this is “real” GDP, it also depends on inflation numbers. BEA doesn’t use the familiar Consumer Price Index for this purpose – CPI comes from an entirely different agency, the Bureau of Labor Statistics.
You can get quite different real GDP growth numbers if you use the inflation figures calculated by the Dallas Federal Reserve Bank. The Dallas Fed developed something called trimmed PCE, the use of which would make real 3Q GDP growth 1.1%. Or, if we all decided that the calculation of “median CPI” performed by the Cleveland Fed was what we should use, then GDP growth was about 0.3%. (Which is of course why we don’t use it!)
And gods forbid we use the method employed in Europe for calculating inflation. Evidently, housing is not a very big deal in Europe, so it is a much smaller component of the inflation calculation; and if you can believe it, the Europeans actually use an archaic methodology for calculating housing inflation that involves the real prices of home sales, as opposed to a totally artificial guesstimate called Owner’s Equivalent Rent, used by more sophisticated countries like the United States. If we had done things the European way, inflation would have been sky-high during the last decade, and the Federal Reserve would have been forced to raise rates rather than holding them under 1% for far too long. And who knows where the inflation rate would have gone if we hadn’t pricked our little housing bubble.
This week’s letter is all about how we create the sausage that is called inflation. The Fed has a target of 2% inflation. Aren’t we almost there at +1.9% CPI? Not really, as the Fed uses something called the PCE, and it is barely at +1.3%. Which is different again from other measures of inflation. Confused? Hopefully, we can make sense of inflation today and have some fun along the way with crazy government statistics.
If, like me, you are ancient enough to remember the 1970s, you will recall that inflation was Economic Enemy #1. Presidents Gerald Ford and Jimmy Carter spent most of their terms trying to Whip Inflation Now. Their inability to tame it is one reason neither had a second term. Continue reading