17 Sep 2014

“Stable Prices”: A Lesson in Fed-Speak

Federal Reserve, Inflation 26 Comments

There is a lot to say about Janet Yellen’s remarks today about the Fed’s latest meeting, but I wanted to highlight something that always bothers me in these affairs. From the Bloomberg article:

Yellen and her Fed colleagues are debating how much longer to keep interest rates near zero as they get closer to their goals for full employment and stable prices. Some officials have said dropping the “considerable time” pledge would give the Fed more flexibility to react to the latest economic data.

Even so, “Economic conditions may for some time may warrant” a federal funds rate that’s below normal levels, even when data are near the Fed’s objectives for maximum employment and low and stable inflation, Yellen said.

The personal consumption expenditures index (SPX), the central bank’s preferred price gauge, increased 1.6 percent in July from a year earlier and hasn’t exceeded the Fed’s 2 percent objective since March 2012. [Bold added.]

In the above excerpt, I’ve highlighted the annoying tendency for analysts to refer to a 2% annual rise in (some measure of) prices as “stable prices.” No, that’s a stable *rise* in prices.

This isn’t an isolated thing. I can’t find it now, but a couple of years ago I quoted some big gun economist (it may have been Christina Romer, but I’m not sure) complaining that price inflation below 2% threatened price stability.

Note: At a constant price inflation rate of 2% annually, the dollar would lose half of its purchasing power in 35 years. That’s not “stable prices.”

26 Responses to ““Stable Prices”: A Lesson in Fed-Speak”

  1. Bogart says:

    What is worse is that their measurement of inflation has changed AGAIN. I remember it being the CPI, then it became the Core CPI when the CPI did not show what the Feds were looking to see. Of course later it became this “personal consumption expenditures index (SPX)” that gives an even lower amount. But still that is not low enough so during the same period they redefined the term “Stable” to mean growing at over 2% instead of not growing or declining at all.

    I blame the late Milton Friedman for this 2% foolishness. He came up with the idea of having inflation, the supply of money and credit above savings, increase at exactly 2% to provide stimulus despite the well known “Theory of Money and Credit” As brilliant as he was, he failed to understand that it was not the 2% increase that was bad but the redefinition of the terms inflation and stability that would be damaging.

  2. Cosmo Kramer says:

    We have a tendency to over-analyze the inflation rate. A wage that kept pace with inflation from 1970 until now does not yield the same quality of life. I say this because of the recent debates I’ve been in due to my video debunking Nick Hanauer and his “banned” Ted talk.

    As far as I can tell, a person who’s wage did not keep pace with inflation is better off than in 1970. Much more research would need to be performed, but I think this is worth talking about. Or perhaps I am missing something?

    • Enopoletus Harding says:

      Cosmo, your videos make a lot of good points, but I strongly recommend you follow Gary North’s advice about video and audio quality in order to improve viewer engagement.

    • Rick Hull says:

      That’s an interesting test, if not useful. Thanks to technology and increased productivity, we would expect baseline improvement in economic well-being for a hypothetical person, from 1970-2014, regardless of real wage, nominal wage, or inflation. Your test ignores this, wanting to show that despite real wage reduction, well-being still improves, so therefore the real wage reduction must not have been harmful.

      Of course, Austrians believe that minimal market intervention maximizes efficiency and productivity, where smaller inputs (labor, land, capital) yield larger outputs (desired consumption goods). Thus market money rather than funny (political, interventionist) money results in a larger baseline improvement over time. Austrians worry that, rather than merely dragging down improvement over time, market interventions could stop and reverse progress.

      Regardless of Austrian tenets, it seems clear that much of the improvement from 1970-2014 was produced by the remaining capitalism in nominally-capitalist economies, which was then spread to non-capitalists. For example, would mobile phones in Africa — a continent notoriously hostile to and poor in capital — exist without their development by Western economies? Austrians worry that non-capitalists take the fruits of capitalism for granted, and that they will eventually kill the golden goose.

      Can you see why your comparison, testing for the harm of inflation, is not persuasive here?

    • Major.Freedom says:

      Better off than the past, but better of counter-factually as well?

      • Cosmo Kramer says:

        Thus far I have only considered well being from one point in time to another, without considering being under differing conditions. Ultimately I’d like a better counter-argument to the tired Reich talking points.

        • Major.Freedom says:

          Personally I think only counter-factuals have meaning in these kinds of comparisons.

          Just like it would not make sense to say the rules/laws have gotten better based on me becoming more wealthy over my lifetime through working and accumulating savings for the benefit of my future self, so too does it not make sense to say the same thing about sequential generations of people.

  3. Tel says:

    Check the FRED graph: “Producer Price Index: All Commodities”, since 2011 it has neatly stayed between 200 and 205, until recently Yellen has allowed it to creep a fraction above that, 208 or something.

    That’s the stable price they are targeting … i.e. back to commodity money.

    There are plenty of other problems in the US economy, but the Fed can’t fix everything, actually it can’t even fix employment, best it can go is keep the US dollar stable, and it’s doing a surprisingly good job of that given the situation.

    • Bogart says:

      Of course there will be indexes that have not changed significantly over some period of time, but others (The equity market indexes have). That is the core of the Austrian argument that the benefits of inflation (Addresse in the comments below) are not distributed evenly to all people in the economy. So it is easy to point to some measure and say look no inflation when all individuals in the economy have been and are continuing to be adjusting their lives to deal with nonexistent inflation.

  4. Bob Roddis says:

    As my focus of interest is getting average people to understand what I perceive to be the simple-to-understand basics of Austrian analysis, we need a plan to get average people to understand that inflation is a purposeful government program and not a mysterious force of nature. Once they understand that, let the Keynesians try to baffle them with their BS.

    • Philippe says:

      “inflation is a purposeful government program and not a mysterious force of nature”

      so why are they trying to figure out how to raise the rate of inflation?

      • Gamble says:

        Ah you fell for it.

      • Rick Hull says:

        New money enriches the first recipients at the expense of everyone else. Holding goods constant, those closest in line to the money trough are able to outbid everyone else for goods. Like any good government program, it showers benefits on a relatively narrow, politically focused group while distributing losses across the disorganized masses.

        Where new money enters the private economy via asset swaps, one must consider the effects on that asset class — whether asset holders or asset originators benefit from the unlimited bid potential of the monetary authority.

        • Rick Hull says:

          Sorry, I think I used the term “asset swap” incorrectly. I am referring to asset purchases by the monetary authority, where the monetary authority exchanges new money for private assets (e.g. government bonds, mortgage-backed securities).

          • Rick Hull says:

            “private assets” => “privately held assets”

        • Bala says:

          He needs to first understand that inflation is an increase in supply of money not offset by an increase in demand for money. As of now, he considers one possible effect of inflation, i.e., prices after inflation being higher then prices prior to inflation, as the definition of inflation itself.

          Once that mountain is climbed, lots more of what is being said might begin to be comprehended. Until then, you’re banging your head on a brick wall.

          • LK says:

            “He needs to first understand that inflation is an increase in supply of money not offset by an increase in demand for money.”

            Given that Philip is well aware of that Misesian definition of inflation, and has pointed it out to the Austrian commentators here, and actually it is the **Rothbardians** around here who reject that definition, that joke is on you, bala.

            • Gamble says:


              Inflation to me, will always be expansion of monetary base.

              Rising prices are a symptom. Rising prices are NOT inflation.

              Does this put me at odds with Rothbard, NO.

  5. Gamble says:

    I cooked some chicken breast last night. They started as what appeared to be big juicy breast. When the were finished, they were nothing more than little pucks. Read the package closely, injected with 25% water.

    Not shrinkflation but still a rising price in disguise.

    That Fed target of 2% is just a cover for central power and control.

    Stable prices and full employment sounds so warm and fuzzy. It is like throwing teddy bears at little kids.

  6. Gamble says:

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