The Fed Doesn’t Believe We Have Inflation (TBT, TLT, IEF, TBF, TMF)

Jeff Harding: The CPI for September came out showing year over year price inflation at 3.9%, up from last month’s 3.8%. Prices increase 0.3% over August.  Core price inflation (less energy and food costs) increased only 0.1% over August and is up 2.0% for the year. The BLS said:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in September on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.9 percent before seasonal adjustment.

Increases in energy and food indexes were the main cause of the seasonally adjusted all items increase. The gasoline index continued to rise, and indexes for electricity and natural gas increased as well. Broad increases in food indexes also continued in September, with the food at home index rising 0.6 percent for the third month in a row and no major grocery store food group indexes declining.

The index for all items less food and energy increased 0.1 percent in September, its smallest increase since March. The index for apparel declined in September after a series of sharp increases, and the indexes for used cars and recreation turned down as well. The indexes for new vehicles and household furnishings and operations were both flat. The shelter index rose, but posted its smallest increase since April, while the indexes for medical care, airline fares, and tobacco all increased.

The 12-month change in the all items index, which was 3.8 percent in August, edged up to 3.9 percent in September. The 12-month change for all items less food and energy remained at 2.0 percent for the second straight month. The energy index has risen 19.3 percent over the last year, while the food index has increased 4.7 percent.

Here is the trend:

Among other things, Social Security recipients will get a 3.6% raise. Thank’s to those of you who are working.

The Fed is not worried about this at all. First, “The Fed believes inflation will slow after a spike earlier this year as lower prices for oil and other commodities work their way through a feeble economy.” Second, they rather like the PCE index which is generally lower than the CPI. Third, they prefer “core” within the CPI as a better indicator of price inflation because it is lower. In other words, they dislike reports of high price inflation.

A typical response from mainstream economists is:

“Inflation is playing out according to the Fed’s script,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester,Pennsylvania. “The economy is sluggish and businesses are very hesitant to pass on higher input costs to consumers. Consumers are very price sensitive right now.

I am sure he is right and the Fed believes everything is going according to plan—not! (as Borat would say). In fact nothing has gone according to “plan” by the Fed although they tend to spin the data to make it appear that way. Nothing Chairman Bernanke has predicted has happened so I believe the Fed’s “plan” is actually a failure and if we believed what they were saying was true, why haven’t we recovered already?

Here are comments from the Fed’s meeting on October 12:

“With stable inflation expectations, significant slack in labor and product markets, slow wage growth, and little evidence of pricing power among firms, inflation was likely to decline moderately over time,” the minutes said. Participants also saw “considerable uncertainty surrounding the outlook for a gradual pickup in economic growth.”

What is happening is that prices are increasing at a relatively high rate. I say relatively because one has to measure price inflation against what is happening in the economy today. For example, Treasury rates are at historic lows, and at 3.9% price inflation, at those yields investors are eating up capital at a high rate. Also, real earnings are declining, down 01% for September, according to another BLS report released today. Since reaching a recent peak in October 2010, real average weekly earnings have fallen 2.0%. So if prices are increasing at 3.9%, then employees are falling behind at a much greater rate than reported. Perhaps that is what is behind the complaints of shoppers at the supermarket.

Let’s face it, it is difficult to get really high price inflation by helicoptering money into the economy (quantitative easing). You can get “decent” price inflation though, and these numbers prove it. Regardless, the Fed still sees current price levels as benign. And, as most commentators have been saying, it opens the door for another round of quantitative easing if needed. With unemployment at 9%, they will find that it is “needed.”

Of course what that will do is destroy more capital, destroy more savings, deprive savers of a return on capital, and help keep essentially bankrupt businesses afloat. That will only drag out the recession/depression further and cause the millions of unemployed further anguish because of economic stagnation, and the elderly and savers will be robbed of their future.

Related: ProShares UltraShort 20+ Year Treasury (NYSE:TBT),  iShares Barclays 7-10 Year Treasury Bond Fund (NYSE:IEF), ProShares  Short 20+ Year Treasury (NYSE:TBF), iShares Barclays 20+ Year Treas Bond  (NYSE:TLT), Direxion 3X leveraged 30-Year Treasury Bond ETF (NYSE:TMF).

Written By Jeff Harding From The Daily Capitalist

The Daily Capitalist comments on economics, politics, and finance  from a free market perspective. We try to present fresh ideas the reader  would not find in contemporary media. We like to call it  “unconventional wisdom.” Our main influences are from the Austrian  School of economics. Among its leading thinkers are Carl Menger, Ludwig  von Mises, Friedrich von Hayek, and Murray Rothbard. There are many  practitioners of this school today and some of their blogs are shown on  the blogroll. We trace our political philosophy back to Edmund Burke,  David Hume, John Locke, and Thomas Jefferson, to name a few.

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