Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
The Global Economy Looks Disturbingly Like Japan Before Its “Lost Decade” - 19th April 19
Growing Bird of Paradise Strelitzia Plants, Pruning and Flower Guide Over 4 Years - 19th April 19
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19
Online Grocery Shopping Will Go Mainstream as Soon as This Year - 17th April 19
America Dancing On The Crumbling Precipice - 17th April 19
Watch The Financial Sector For The Next Stock Market Topping Pattern - 17th April 19
How Central Bank Gold Buying is Undermining the US Dollar - 17th April 19
Income-Generating Business - 17th April 19
INSOMNIA 64 Birmingham NEC Car Parking Info - 17th April 19
Trump May Regret His Fed Takeover Attempt - 16th April 19
Downside Risk in Gold & Gold Stocks - 16th April 19
Stock Market Melt-Up or Roll Over?…A Look At Two Scenarios - 16th April 19
Is the Stock Market Making a Head and Shoulders Topping Pattern? - 16th April 19
Will Powell’s Dovish Turn Support Gold? - 15th April 19
If History Is Any Indication, Stocks Should Rally Until the Fall of 2020 - 15th April 19
Stocks Get Closer to Last Year’s Record High - 15th April 19
Oil Price May Be Setup For A Move Back to $50 - 15th April 19
Stock Market Ready For A Pause! - 15th April 19
Shopping for Bargain Souvenirs in Fethiye Tuesday Market - Turkey Holidays 2019 - 15th April 19
From US-Sino Talks to New Trade Wars, Weakening Global Economic Prospects - 14th April 19
Stock Market Indexes Race For The New All-Time High - 14th April 19
Why Gold Price Will “Just Explode… in the Blink of an Eye” - 14th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Inflation - Don’t Be Fooled By Our Current Price Stability

Economics / Inflation Aug 20, 2015 - 02:10 PM GMT

By: Frank_Shostak

Economics

The yearly rate of growth of the personal consumption expenditure (PCE) price index adjusted for food and energy stood at 1.3 percent in June — the same figure as in May. Note that on average since the beginning of this year the yearly rate of growth stood at 1.3 percent. Many economists have expressed satisfaction that the yearly rate of growth has been stable so far notwithstanding that it stood below the Fed’s target of 2 percent.


Meanwhile, the yearly rate of growth of the overall personal consumption expenditure price deflator stood at minus 0.01 percent in June, versus minus 0.1 percent in May, and 1.4 percent in June last year.

Percent Change Price Index Less Food and Energy (YOY)
Percent Change Price Index YOY

Stability in the yearly rate of growth of the PCE less food and energy price deflator is regarded as a very important thing for most economists. It is held that a stable price level will make the movement in the relative prices of goods and services more visible, thereby allowing a more efficient allocation of resources.

There is the danger that focusing on so-called price stability may cause economists to overlook the underlying factor that is likely to set in motion an economic bust. However, this underlying factor may be the decline in the growth momentum of the money supply during October 2011 to October 2013.

Figure 3

Note that during 1927 to the end of 1928, the US consumer price index was displaying relative stability (see first chart below).

This caused many commentators to suggest that the US economy had reached a state of economic stability and to ignore the fact that the growth momentum of the money supply fell sharply during February 1925 to June 1927.

This sharp decline set in motion an economic bust of the stock market in October 1929 and the following collapse of economic activity.

Figure 4
Figure 5

According to Murray Rothbard,

One of the reasons that most economists of the 1920’s did not recognize the existence of an inflationary problem was the widespread adoption of a stable price level as the goal and criterion for monetary policy. … The fact that general prices were more or less stable during the 1920’s told most economists that there was no inflationary threat, and therefore the events of the great depression caught them completely unaware.

(Note that for most economists inflation is persistent rises in prices rather than increases in money supply.)

Observe that the yearly rate of growth of industrial production climbed from 4.6 percent in February 1927 to 16.6 percent by July 1929, before plunging to minus 31 percent by July 1932.

Figure 6

It is likely that the severity of a bust is dictated by the state of the pool of real wealth, namely, whether or not there are still a sufficient number of wealth generators to support various bubble activities that have emerged on the back of the loose monetary policy of the Fed.

Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. He is chief economist of M.F. Global. Send him mail. See Frank Shostak's article archives. Comment on the blog.

http://mises.org

© 2015 Copyright Frank Shostak - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules