Yesterday we cited the latest CPI report – up 7.5% from a year ago – which is prompting an uproar over accelerating inflation. Analysts are widely calling for aggressive rate hikes from the Fed, some including officials of the Fed itself. Markets are in turmoil over the prospect. The Fed faces a dilemma, because such aggressive action would validate market fears, yet if it fails to act, that itself could upset markets on fear the Fed is falling even further behind the curve.
This is all tragically unnecessary. This inflation did not just materialize. It’s not even accelerating. As we pointed out weeks ago, It’s Been Inflation All Along. This was hardly the first time Financology has raised the alert … we identified an inflation problem back in 2020, for example in Inflation Is Here. We’ve been calling for the Fed to allow rates up off the floor since mid-2020. The Fed has gravely erred in waiting too long to act.
We discussed a core fallacy underlying this error in our last post – the unjustified assumption that inflation can only be defined by and detected in US domestic consumer prices. By excluding consideration of asset prices, such as those we cited way back in 2020 in Inflation Is Here, the Fed deliberately blinded itself to the problem. It merely compounded that error by engaging in persistent denial when, even after it was showing up in consumer prices, it dismissed it as “transitory”. As we pointed out at the time, the inflation would be just as transitory as the policies causing it.
We have even traced this wave of inflation back further, to the beginning of 2019, when the Fed abandoned its campaign to normalize interest rates. Not merely content to arrest a decline in asset prices, it continued to cut rates, inflating them to new heights.
Yet Financology called for aggressive Fed Treasury purchasing in the wake of the deflationary crash triggered by the corona crisis in early 2020; in particular, in Calling All Helicopters, on March 18, 2020. The Fed responded on March 23. Alas, the Fed did not stop there, but also bought mortgages, corporate bonds, and foolishly committed to literally years of zero rate policy. It’s as if you went to the doctor for an emergency appendectomy, and he removed your appendix every week for two years.
Sheer economic malpractice.