In conjunction with the record highs in stock prices, the CPI data released today continues to show that ZIRP suppresses consumer goods inflation while inflating asset prices.
This should be news to no one. The Bank of Japan dropped interest rates below 1% more than 20 years ago and to zero in 1999 and their CPI has been zero ever since. The US has had ZIRP and very low inflation since 2009. Central banks ignorantly and willfully ignore these facts. Instead, they impose policies that foster wild speculation and financial engineering schemes. These policies benefit no one but speculators, hedge fund managers, and corporate executives.
The BLS reported headline CPI for July at a seasonally adjusted annualized rate of zero, with core CPI at 0.1%. I won’t quibble with that. The annual rate of change on a not seasonally adjusted basis was +0.8% on the headline number versus +1.0% in June, so there was clearly some softening in July.
The Fed first enunciated its 2% inflation target in 2012. It focuses on the core PCE, which clearly understates actual consumer inflation using mechanics which I have recently covered here and in numerous past posts. Using a less biased measure such as the Producer Price Index for Finished Consumer Goods, inflation has run at a compound growth rate of +2.1%. That slightly exceeds the Fed’s target ever since it was first established.
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This is even after a flat period that has persisted for the past 6 months. This has been a common pattern since 2012, with inflation subdued in the first half of the year, then surging in the second half. At any rate, fairly measured, consumer inflation has been above the Fed’s target.
Based on core CPI, which severely undercounts housing inflation, whether by house prices or rents, inflation has undershot the Fed’s target. Core CPI has had a compound growth rate of 1.9% since 2012.
The Fed focuses on Core PCE, which is an even more suppressed measure. The Fed has thus been able to pretend that inflation has been well below the target of 2%. Core PCE has a compound growth rate of 1.5% since 2012. That has been one of the Fed’s main reasons for keeping interest rates near zero.
Not only is there no evidence that super low interest rates stimulate consumer inflation, there is plenty of evidence that ZIRP actually suppresses consumer prices. Prices will only rise to whatever the traffic will bear. Given current policy and the resulting effects, American consumers simply cannot afford to pay prices that rise faster than their wages.
QE and ZIRP have diverted money into speculation by bankers, hedge fund managers, other leveraged speculators, and of course, corporate executives. They use interest free debt to have their companies buy back the shares they issued to themselves under stock option grants. Meanwhile they shortchange investment in labor. They keep domestic wages low by either replacing workers with automation, or by importing cheaper labor, or by exporting American jobs to places where they can be done more cheaply. Consumer prices can’t rise faster because consumer demand is weakened by current policy.
Money printing (QE) has stimulated inflation, just not the kind that economists define as inflation. They keep their focus strictly on the CPI and PCE, which are arbitrary baskets of consumption items designed to understate actual consumer inflation. The Federal Government created the CPI to index the cost of government benefits, salaries, and contracts to the “cost of living.” That can be whatever the government wants it to be. Throughout its history CPI methodology has been repeatedly changed to keep the numbers as low as possible.
The government, economists, and the Wall Street media make no pretense of measuring monetary inflation or asset inflation. Economists and policymakers completely ignore these kinds of inflation. In fact, asset inflation isn’t even called “inflation.” It’s called “appreciation” or “gains” or “growth.” It all sounds very benign.
But it isn’t. Inflation of asset prices can only continue for so long. Eventually they collapse, bringing disaster to the financial system. That only starts another round of monetary inflation and the cycle goes on ad infinitum, constantly weakening the economic base over generations. Total debt has grown exponentially with round after round of ever increasing monetary stimulus. It is no accident that the real growth rate of the US economy has dropped over the past 40 years from around 5% to around 1-2%. Monstrous levels of debt are slowly but surely bleeding the US economy to death.
So keep this in mind the next time Wall Street economists and pundits claim that “there’s no inflation.” Since ZIRP was instituted in 2009, the money supply has inflated at a compound annual growth rate of 6%. Meanwhile government measures of consumer prices have only inflated by 1.5% to 1.9% over that period.
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That money hasn’t simply lain fallow. It has caused massive inflation in asset prices. Stock prices have risen at a compound annual rate of 13.8% since 2009. Housing prices have risen at a compound rate of 11% per year based on the current MLS data from the NAR, which is the broadest and most comprehensive data on the housing market.
So ZIRP has clearly resulted in inflation, just not where the Fed economists are looking. They turn a blind eye to asset inflation, ignoring its growing danger to the fragile financial system and US economy.
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