Wednesday, July 17, 2024

Blue is the interest rate. Tan is inflation.

Inflation went above the 2 percent target early in 2021. The Federal Reserve waited a year before raising interest rates.

Graph #1: Blue is the interest rate. Tan is inflation. Brown is blue behind tan.

Why the year-long delay? Clearly, inflation continued to grow worse until they raised the interest rate. Clearly, inflation started to go down soon after the interest rate started to go up. Why the delay?

Was it election interference by Donald Trump?

Sunday, July 14, 2024

Chairman Smith, second try

I got distracted yesterday and ended up at my favorite topic -- misunderstanding the economy. I'm back now, trying to focus on Chairman Jason Smith's statement on the Biden inflation. I have to begin by restating something I said, wow, almost a month ago now.

On the graph below, blue shows "Headline" CPI inflation and red shows "Core" CPI inflation. The two follow roughly the same path, but the blue line shows a lot more up-and-down motion than the red line does. The blue line, in other words, is more volatile.

Headline and Core inflation have their differences. But often when Headline inflation is rising, Core is rising also. And often when Headline is falling, so is Core. Sometimes the two follow the same path, but blue is much more jiggy than red. The jigginess is volatility. And then sometimes, Headline inflation shows a substantial drop or substantial increase, or both in turn, while Core makes nothing but small steps. Again, there is less volatility in Core than in Headline.

The red line is less "jiggy" because Core PCE is less "volatile". Core PCE is less volatile because they leave out the most volatile data -- food and energy. The stats people want to take some of the noise out of the numbers -- or at least that's what I would want to do -- so they omit that volatile data.

Graph #1:  Headline (blue) and Core (red) CPI Inflation since 1980

Before I made the graph and actually looked at it, I thought that Core PCE understated inflation. It does not. It understates changes in inflation. Usually, with Core PCE, the highs are less high and the lows are less low. Usually, but not infallibly, Core PCE smooths out the data. It's all there on the graph. All I had to do was look.

When inflation is in the news, it is because inflation is increasing. When inflation goes high, if we compare Core inflation to Headline on a graph, Core will often appear to understate the inflation, because the highs of Core inflation are less high than those of Headline inflation.

When inflation goes low, Headline inflation (the more volatile one) goes down rapidly. Core inflation (the less volatile one) goes down more slowly. At such times, Core inflation appears to overstate the inflation, because it understates the decline

As a rule, Core inflation understates the changes. The highs are less high, and the lows are less low.


Chairman Smith's statement ends with half a dozen bullet points under the heading "Key Background". The last of these bullet points is

  • Inflation has become so deeply ingrained in the economy that when removing food and energy this month’s core inflation number of 5.3 percent is even higher than the topline figure.

I want to restate that, for clarity:

This month’s core inflation number of 5.3 percent is even higher than the headline number.

I am left with several considerations:

1. Smith mentions "removing food and energy" from the inflation data. This removal is done by the people who provide the stats. Food and energy prices are seen as more "volatile" that other prices. Removing these more volatile prices from the calculation leaves the less volatile "Core" data that the Chairman mentions. So the jiggies of Core inflation are smaller than the jiggies of Headline inflation.

2. I figure what Smith calls a "topline" number is the one that I've seen called the "headline" number. "Topline" sounds like a decent synonym. To avoid confusion, I prefer not to use synonyms. Except, of course, "jiggies" for "volatile".

3. I don't know what the Chairman means by "deeply ingrained" inflation. I suppose he means that inflation expectations are no longer anchored at 2 percent (as Jerome Powell might put it) and that people expect higher inflation. I don't know if the statement is true or not (and I won't guess), but it is how I interpret Chairman Smith's words.

4. Smith's statement doesn't say whether he's looking at PCE inflation or CPI. But the statement is dated 15 June 2023. By that date the May data was probably available for the Chairman's use. A FRED search for headline inflation turns up 6 datasets, including Core PCE and Core CPI:

  • Core PCE (FRED PCEPILFE) for May 2023 is given as 4.68783 percent. That rounds to 4.7 percent, which does not match Smith's 5.3 percent.
  • Core CPI (FRED CPILFESL) for May 2023 is given as 5.33225 percent, or 5.3 percent when rounded. This is the data Chairman Smith was looking at.

5. Smith says Core CPI was "even higher than" Headline CPI for May, 2023. Headline CPI (FRED CPIAUCSL) for that month was 4.12069 percent, which rounds to 4.1 percent. Core CPI for that month, at 5.3 percent, was certainly higher than Headline CPI. Chairman Smith is right about this. And I get a Milk-Bone for my painstaking effort here. 

You can have half, for reading these tedious notes.


Now that I know what Chairman Smith is saying, and the data he used, I can evaluate what he said. As I read him, he says

Inflation has become so deeply ingrained in the economy that the core inflation number is even higher than the headline figure.

His statement strongly suggests that in his view Core inflation is almost never higher than Headline inflation. That's what I used to think. As I said above: Before I made the graph and actually looked at it, I thought Core PCE understated inflation. If Core understated inflation, it would be unusual for Core to be higher than Headline. But Core doesn't understate inflation. It understates changes in inflation. 

It is not unusual for Core inflation to go below Headline. Core is below Headline when it understates rising inflation. 

It is not unusual for Core inflation to go above Headline. Core is above Headline when it understates falling inflation. It's all right there on the graph.

It is likely that we are most concerned about inflation when inflation is rising. So it is probably true that usually, when we look at inflation on a graph, we see Core understating the increase. But if we should look at a spot on the graph where inflation is falling, or falling rapidly, we would very likely see Core inflation understating the decline. We would very likely see Core inflation higher than Headline inflation because Core understates the decline.

I got the Excel data for Graph #1 above, and subtracted the Headline values from the Core values. I put the results on a bar graph. When Core is greater than Headline, the result is above zero. When Core is less than Headline, the result is below zero:

Graph #2: Core CPI is Greater than Headline CPI when the bars are Above Zero

This graph shows 534 months of data, from January 1980 to June 2024. 295 of those months are above zero (Core is greater than Headline). 239 of those months are below zero (Core is less than Headline). For this sample, Core inflation is more often above Headline inflation than below it. It happens during disinflation, when the rate of inflation is falling. Core goes above Headline when it understates falling inflation. It happens often.

I only figured this out a month ago. But I'm a hobbyist, studying the economy for my own satisfaction. It troubles me that Chairman Jason Smith of the House Ways and Means Committee doesn't know it.

On Graph #2, most of the 1980s show the blue bars above zero, meaning Core inflation was higher than Headline inflation. This was during the Volcker disinflation. Headline inflation came down rapidly. Core understated that decline every month from July 1981 to July 1987.

And again, every month from March 2023 to end-of-data show the blue bars above zero, meaning Core inflation was understating the decline of Headline CPI. I guess we'll have to call this the Biden disinflation.

Core inflation understates changes in Headline inflation. It's a pretty good rule. I just wish the Chairman of the House Ways and Means Committee understood it.


The Core inflation Smith mentions for May 2023 was higher than the Headline number. Chairman Smith seemed to think this most unusual. But it is often true that Core inflation is higher than Headline inflation.

Looking at the May 2023 data, Chairman Smith said Core inflation was higher than Headline inflation because inflation "has become so deeply ingrained" in us. Maybe he meant we expect inflation to be higher than 2 percent. Or maybe he just meant we expect inflation, always.

We do expect inflation, always, because we always have inflation. Granted, we don't always have 9 percent inflation. Usually it is much lower. But almost always, we have inflation.

Core inflation was higher than Headline in May 2023 -- in fact, higher in every month from March 2023 to the most recent data, June 2024 -- but not because inflation is "deeply ingrained". Core inflation has been running higher than Headline inflation because Headline inflation has been coming down. Headline inflation has been coming down, and Core has been understating that change. So Core inflation  has been higher than Headline inflation. It is not unusual, and it is not because inflation is "so deeply ingrained."

This is the Biden disinflation, remember. Inflation is coming down. and Core understates that change. So Core inflation has been running higher than Headline inflation. Just like the Volcker disinflation.

Saturday, July 13, 2024

Chairman Smith

I'm looking at this article, dated 15 June 2023: "Chairman Smith: Biden’s Failed Economic Policies Forcing Fed to Choose Between Chronic Inflation or Risk of Recession"

Chairman Smith is Jason Smith, Chair of the House Ways and Means Committee. The Committee "shapes fiscal legislation". Here are the opening sentences of the article:

WASHINGTON, D.C. – Despite prices continuing to rise and inflation having increased 15.5 percent since President Biden took office, the Federal Reserve has been backed into a corner by the Biden Administration’s failed economic policies and forced to choose between pausing interest rate hikes or moving forward with another increase, which would further squeeze our weakened economy and risk recession.

Chairman Smith released the following statement in response to the Federal Reserve’s decision to pause interest rate hikes:

“President Biden’s reckless actions have put the Federal Reserve between a rock and hard place. The Fed is having to choose between hiking interest rates to combat the inflation crisis caused by reckless Democrat spending, risking the health of our overall economy, or pausing those rate hikes and hoping prices do not continue to spiral out of control...

That last paragraph pretty well describes what people seem to feel about the inflation of recent years: caused by reckless Democrat spending. Even Democrats feel that way, if we judge by the way the Dems on TV have failed to offer an equally strong alternative cause of what is commonly called "the Biden inflation".

I want to point out that Chairman Smith's phrase "caused by reckless Democrat spending" is an assumption. It seems strong because people accept that explanation. But the Chairman sticks the phrase into that sentence with no examination of relevant facts.

I want to point out also that failing to examine the relevant facts very often leads to misunderstanding the cause of the problem being examined. And misunderstanding the cause of the problem very often leads to solutions that do not work. 

Federal deficits are a case in point. Everyone thinks the federal deficits are caused by excessive government spending, and that this spending and those deficits are the reason our economy is in such bad shape. But federal spending and deficits are the result of our long economic decline, not the cause of it.

We have been struggling to overcome the federal deficits now for 50 years or more, with very little success. The reason for our lack of success is that we misunderstand the problem. It is not federal debt that slows the economy, but excessive private debt. Yet not once in 50 years have we tried to reduce private debt. Oh, sure, Biden has tried to forgive student debt, while Congress and the Court have undermined his efforts. But Biden's efforts address such a small part of private debt that even if he succeeded there would be no noticeable improvement in our economy. Anyway, Biden's plan for debt forgiveness is offered as a way to help people out, not as a way to improve the economy by reducing excessive private debt. Biden misses the point entirely.

Biden's plan for debt forgiveness is a way to help people cope with a bad economy. It isn't a plan to fix the economy. This tells me that Biden and his advisers misunderstand the economic problem. They fail to see that it is not government debt, but private debt that holds our economy down.

It was the same with Bill Clinton. Clinton spent the 1990s reducing federal deficits and finally, it is said, balanced the budget. Household debt picked up the slack, increasing more rapidly in the 1990s than before, and more rapidly yet in the 2000s -- until the 2008 financial crisis brought that all to a sudden halt.

That sudden halt was evidence of misunderstanding.

Before we decide to blame Democrats in general, along with Biden and Clinton, let us pause to remember that Bill Clinton and Newt Gingrich worked together to come up with the plan to balance the federal budget. The Democrats, under Clinton, adopted the Republican strategy. Unfortunately, the Republican strategy is based on a misunderstanding of the economic problem.

Democrats don't have a clue about the economy. Democratic policy is always and everywhere a way to help people cope with a bad economy. Coping is not the same as fixing.

Republicans do have a clue about the economy. They seem to want to return to the policies of the 1800s. Unfortunately, those policies no longer work. The economy changes. The economy evolves. Economic thought must evolve with it, or it is Fall-of-Rome for us.

This little piggy has bad policy.
That little piggy has none.

Wednesday, July 10, 2024

On measuring inflation

From CNBC, 28 June 2024:

The Fed focuses on the PCE inflation reading as opposed to the more widely followed consumer price index from the Labor Department’s Bureau of Labor Statistics. PCE is a broader inflation measure and accounts for changes in consumer behavior, such as substituting their purchases when prices rise.

While the central bank officially follows headline PCE, officials generally stress the core reading as a better gauge of longer-term inflation trends.

So now I know: Headline PCE is "preferred" but Core PCE is "better".

The CPI runs higher than the PCE measures, and the Fed doesn't like it at all.

That part about the PCE measures accounting for changes in consumer behavior, well isn't that special. It means when prices get so high that we can no longer afford to buy meat, they take meat out of the inflation calculation. This is the preferred way to keep inflation down.

Well, at least the irony is good.

Tuesday, July 9, 2024

An alternative to will-he-or-won't-he

I am so tired of Democrats in the news, wasting their days bickering about whether Biden should stay in or get out of the November election. It would be far more productive to directly attack Donald Trump.

Trump created the Biden inflation, just as Nixon created the early-1970s inflation, by convincing enough of the voting members of the FOMC to delay raising interest rates. Call it election interference.

Asked if he created the Biden inflation, Trump would of course deny it. But Trump lies. He lies all the time. And he lies to make himself look good. So I have no choice but to believe that the truth would make Trump look bad.

Friday, July 5, 2024

It was never Biden's inflation


"... the federal funds rate had never been so low with inflation so high at a point when the Fed began increasing rates."

The Biden inflation was created by Donald Trump. All Trump had to do was delay the increase of interest rates after Jerome Powell's March 2021 warning that inflation was coming. 

I don't know how Trump did it, but I know he did it. Rates did not increase for a year after Powell's warning.

15 March 2020: Covid is in the air. The Federal Reserve ("the Fed") lowers the interest rate to zero.

4 March 2021: Fed Chairman Jerome Powell starts the clock. At the WSJ Jobs Summit, Powell said:

So right now inflation is running below 2%, and it's done so since the pandemic arrived. We do expect that as the economy reopens, and hopefully picks up, we will see inflation move up...

17 March 2021: At the press conference, Powell said pretty much the same:

Over the next few months, 12-month measures of inflation will move up... as the very low readings from March and April of last year fall out of the calculation. Beyond these base effects, we could also see upward pressure on prices if spending rebounds quickly as the economy continues to reopen, particularly if supply bottlenecks limit how quickly production can respond in the near term... The median inflation projection of FOMC participants is 2.4 percent this year and declines to 2 percent next year...

 15 April 2021: The Bureau of Labor Statistics reported:

Consumer prices increase 2.6 percent for the 12 months ending March 2021

Already in March of 2021, when Powell said he expected 2.4% inflation, he got more than expected. And all the rest of the inflation we've had since then has been above the 2.6% number.

March 2022: One year after Powell's inflation warning, the Fed begins raising the interest rate. They were a year too late. The interest rate was at zero. Low rates encourage inflation, and you can't go lower than zero. The one-year delay before raising rates was a highly effective way to create inflation and turn voters against Joe Biden.

June 2022: Just three months after the Fed finally began raising interest rates, inflation peaked. It took very little effort to break inflation's upward momentum. That's why I say printing money was not the direct cause of this inflation. The delay in raising interest rates was the cause.

It took a year for inflation to fall from 9 percent to 3 percent. Since June 2023 inflation has been stable at around 3.3 percent. In sum, it is now three years and four months since Jerome Powell warned us of inflation. It is two years and four months since the Fed decided to do something to fight the inflation. The one-year delay was a very effective strategy for turning voters against Joe Biden.

"Attack. Attack. Attack," wrote the New York Times. "Delay. Delay. Delay. Those two tactics have been at the center of Donald J. Trump’s favored strategy in court cases for much of his adult life..."

It worked with monetary policy, too: Attack and delay. Trump created the Biden inflation.

Download and share my 12-page PDF: "The Plan, Parts 1 and 2"