Inflation Targeting—The Wall Street Pleasuring Scam That Has To Stop

Last week the Fed’s so-called battle against inflation suffered yet another rebuke. Even if we take its favored “core” PCE price index, which excludes the entirety of food and energy, the inflation rate rose by 3.0% annualized in April; and the six-month annualized core PCE price index, which filters out the monthly squiggles, accelerated to 3.2%. That was the worst increase since July last year (red), meaning that lately the Eccles Building is making precious little progress toward its sacrosanct “goal” of 2.00%.

Actually, it’s not really progress at all in the real world meaning of the term. If the current six-month rate were to persist for a decade, a dollar earned or saved in April would be worth only 72 cents.

Then again, why in the world do they get away with claiming that the PCE deflator sans food and energy is a valid measure of inflation in the first place? After all, just since January 2012 when the Fed officially adopted inflation targeting and its 2.00% goal, the more reliable 16% trimmed mean CPI (red line) is up by 25% more than the core PCE deflator (black line).

That’s right. The consumers dollar has lost fully 40% of its purchasing power just since the Fed embraced formal inflation goals, yet the only topic of conversation on Wall Street upon the release of the April PCE deflator was how soon the Eccles Building could pronounce “close enough for government work” on the pesky matter of inflation, and therefore get back to its real business, which is printing money, suppressing interest rates and flooding Wall Street with a river of cheap liquidity.

That is to say, is not the obvious now more than obvious? Rather than some kind of glorified public service institution expertly optimizing its jobs and inflation mandates for the benefit of main street, the Fed has been captured lock, stock and barrel by the gamblers and money-shufflers down in the canyons of Wall Street.

Indeed, given the devastation that sustained inflation brings to everyday wage earners, savers and fixed income retirees, you’d think that out of an abundance of caution they would pick the most conservative inflation ruler available, not the shortest one.

But, no, the short ruler they prefer is just the opposite. With the passage of time it gets further and further behind the true rise in the cost of living. For instance, just since January 2012, the Fed’s preferred core PCE deflator is up by 32%, when the more reliable and comprehensive 16% trimmed mean CPI is higher by 40%.

16% Trimmed Mean CPI versus CPI and PCE Deflator Excluding Food and Energy, 2012 to 2024

Once upon a time, of course, even the Fed was in the business of ensuring that the purchasing power of the dollar was stable over time. And since the dollar was tied to a fixed weight of gold it was not tempted to embrace cockamamie theories like the Keynesian Phillips Curve, which falsely claims that just the right amount of inflation is an enabler of real economic growth and prosperity.

They knew better. For instance, during the prosperous span between August 1921 and August 1929, the CPI (black line) actually fell by -2.3%. Yet during that same period US economic output, as measured by the industrial production index (red line), rose by +97% or 8.9% per annum. So, pray tell, where was the Phillips Curve hiding during the 1920s?