Paul Krugman has yet another rant out today where he argues that there is no inflation and unless we get some soon we will all be in trouble. Give it a read. (Link)
I made this comment:
PK, What cave are you living in? CPI-W is up at a 7% annual rate in the past six months. (215.262 - 222.954)
Just how high do you want inflation PK? You like 9% maybe? 10% would be better?
Stop blogging. Go shopping. Inflation is very real. You just refuse to see it.
A few minutes later I saw this headline:
Krugman and those who think we ought to be printing more and spending more than we have will not be fazed by the fact that electricity prices are rising at low double digits on an annual basis. PK and his crowd have conveniently excluded both food and energy from their calculations.
Talk about making the data fit one’s conclusions. And this (no less) from a Nobel economist. I guess I should not complain. After all, PK is just another blogger. When it comes to sandbagging on what is happening to inflation in the country the biggest liars of all are sitting at the Federal Reserve Board.
I’ve got one thing to say for the inflation naysayers and manipulators. Just one word covers it all:
RENT
This component of core CPI is about to jump higher. When it does, it’s going to cause the core inflation to catch up with what is happening in the broader measures of price change. Given that Bernanke is very much stuck on his promise to respond to core inflation “a little below 2%” he will be forced to react as this happens. At a minimum, it will tie his hands on additional easing measures.
Should things unfold like this over the next nine months or so it will be an excellent example of just how flawed our monetary policy is. Today, monetary policy for the USA and consequently for a significant part of the rest of the world is totally dependent on a very flawed yardstick. Why?
Bernanke and his cohorts want desperately to develop a methodology where policy is made by a robot. I think that is a cheap way out of their responsibilities. A pragmatic approach is needed. Yes, some ground rules are necessary. Ones that are understood by the markets. But, there is a degree of finesse that is required as well.
Bernanke has created a trap for himself. Rent (of all things) may well trip him up. If he lives up to his word on inflation, he may just end up tightening at the very worst time. That would be in conflict with his other promise. This “scholar” of the depression has said again and again that he will not make the same mistakes of 1936 when policy was tightened and that action precipitated a second leg of the depression.
As its stands now, one promise made by Bernanke is going to be broken. It has to. Either he will fold on his pledge of containing inflation or he will nudge policy (5-7 months from today) and history will repeat itself.
I wish he would recognize that he has created this bind and do the right thing. Go back to Princeton and write a book.
The way that the Fed manages policy requires that it always looks backward. We need a central banker that can look forward as well. We don’t have that today.
