Another Inflation Whopper From The BLS Puzzle Palace

We sometimes think that the honchos at the BLS and other government statistical mills had a previous career selling swampland in Florida. After all, they often want you to believe absolutely preposterous things such as their latest report claiming the battle against inflation has been won—with the Fed’s favorite PCE deflator coming in at a below target 1.65% annualized rate in Q4.

So with the inflation genie allegedly back in the 2.00% bottle, the pot-banging on Wall Street has gotten downright shrill. According to the toddlers in the gambling pits, the Fed should make haste to crank-up its printing presses again, and right soon.

Then again, the wondrous disappearance of inflation reported in the PCE deflator does need some ‘splainin’. That’s because the 1.65% headline gain consisted of some fairly discordant sub-components:

Q4 2023 Annualized PCE Deflator Component Changes:

• Durable goods: -3.52%.

• Services: +3.42%.

• Nondurable goods: -1.03%.

• Overall PCE deflator: +1.65%.

Sure. An inflation index based on a basket of items is supposed to have components going every-which-way. And, in fact, the actual job of free market prices is to enable demand to shift around in response to relative price changes among available goods and services.

But here’s the thing. The Fed’s only real anti-inflation tool amounts to toggling the money market interest rate (i.e. Fed funds) on the theory that this will cause aggregate demand to ebb or flow. In turn, the latter will presumably levitate the rate of inflation up or down.