Edited by W. Joseph Stroupe with the mission of explaining world events correctly via strategic analysis & forecasting
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The question posed by the title of this article has been posed before, many times. However, at this critical juncture where the Fed is faced simultaneously with mounting inflation and slowing growth the trustworthiness of the official CPI measure of inflation has become a major issue, for the Fed must now decide what to do about interest rates in the fight against inflation.
With inflation around 5% according to the official CPI and interest rates also at 5%, should the Fed simply make one or perhaps two additional small .25% hikes in interest rates and then pause out of deference to already slowing economic growth? If the official CPI can be fully trusted then such a move along with a subsequent pause might be a good strategy.
However, what if the official CPI is not trustworthy in portraying accurately the true and full picture of current inflation? What if the CPI is too low a number as compared to the real inflation picture? What if inflationary pass-through from high energy prices to the rest of the economy, not currently demonstrated by the official CPI, does in fact exist as a reality? For the Fed to go ahead anyway and trust the CPI and act as suggested above could result in inflation outstripping the Fed's meager efforts, and the battle against the inflation devil could be forfeited. The stakes at this critical juncture are very high indeed.
As if to make this very point one of the Fed's own has spoken up publicly about the trustworthiness of the official CPI.
Today Federal Reserve Bank of St. Louis President William Poole, a nonvoting member of the Federal Open Market Committee, said that the Fed may be required by mounting inflation to keep hiking interest rates. He stated:
"It's, I believe, certainly my view that if the inflation rate continues to be persistent like this, the Federal Reserve will simply have to pursue persistently policies that will keep that inflation from increasing further".
He also made an admission regarding his doubts about the adequacy of the official CPI calculation to portray the full picture of inflation. He stated:
"Statistical studies to detect pass-through from recent energy price increases have failed to show significant effects in U.S. price data … but stories about widespread pass-through are becoming increasingly common."
"We may face more inflation pressure than currently shows up in formal data."
Boldface added.
While Mr. Poole was careful to say that he believes the current inflation situation is “absolutely not dangerous” and that his doubts on the adequacy of the official CPI calculation "do not necessarily reflect official positions of the Federal Reserve system", his comments are still a bombshell.
If Mr. Poole's comments regarding the official CPI number were deliberate and pre-planned, then he has reminded his colleagues at the Fed that if they get to believing without question the government's own nuanced official CPI number and begin to think that real inflation is only about 5% and that little or no inflationary pass-through exists, they will likely fall far behind in the battle against the inflation devil and risk forfeiting the entire game. They may already be falling behind in the fight. Consequently, Mr. Poole, who is not currently a voting member of the Federal Open Market Committee, appears to have taken to the airwaves in an effort to bring some pressure to bear on his vote-wielding colleagues, pressure that appears designed to rally them to the fight.
It is certainly probable Mr. Poole recognizes this current juncture for what it truly is – the defining moment in the fight against inflation – and perhaps he fears that his colleagues may fall behind in the fight due to their possible denial regarding the real levels of inflation and their justifiable worries about pushing the economy into slower growth if interest rates are raised further.
In any case this juncture is the defining moment. Price inflation and inflationary expectations are mounting, while energy prices refuse to ease. The prolonged high price plateau of energy is clearly prompting inflationary pressures of such a nature that demand forward-leaning diligence and action on the Fed’s part, not unnecessary delay and indecision. Mr. Poole’s point is that waiting for good data to help formulate decisions on rates going forward is all fine and good, but the CPI is inadequate in providing the full picture of the required “good data”.
The Fed’s official CPI number is losing some credibility and effectiveness with the public and the markets as the reality of mounting inflation sets in. Mr. Poole appears to remind the Fed that the official CPI should not now possess full credibility with the Fed either. It must look and think outside the official CPI box if it wants any real chance to win the fight against inflation.
| Note: This Gold version of the analysis is significantly condensed as compared to the full text Platinum version available only to subscribers. The Platinum version addresses head-on the issue of the fundamental unreliability of the official CPI to represent accurately the full picture of inflation and the risks for the Fed if it forgets that fact and places too much trust in the official number. |
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