CLEVELAND, WE DON'T HAVE A PROBLEM
by Paul L. Kasriel 07:00 AM 06|08|2001
But fixed-income investors might be squeezed if Mr. Greenspan continues to ignore inflation data from the Cleveland Federal Reserve.
Jerry Jordan is the president of the Cleveland Fed, which each month publishes a median CPI statistic, an alternative to core CPI published by the Bureau of Labor Statistics. The chart ("Has Mr. Greenspan Seen This?") shows the behavior of the median CPI during the past nine years. In the four months ended May, the Cleveland Fed's median CPI has averaged annualized growth of 3.93% -- up from 2.05% in the four months ended October 1999 and the highest since early in 1992.
But it appears Mr. Greenspan has no use for the Cleveland Fed's median CPI. I suggest that because, on Monday, in a satellite-transmitted address to the International Monetary Conference in Singapore (another frequent-flyer-miles-generating boondoggle?), Greenspan, as quoted by BridgeNews, said that, "at the moment," he sees few signs of inflationary pressure in the U.S. If Greenspan doesn't see a sign of inflationary pressure "at the moment" when he looks at the Cleveland Fed's median CPI, then it is clear that he does not perceive the data as credible. In which case, why should he continue to pay for it? Perhaps he should cut Mr. Jordan's budget.
Just how does Greenspan justify his claim that there are few signs of inflationary pressure in the U.S? He says that businesses have to absorb their higher unit labor and energy costs in slimmer profit margins because of their inability to pass through these costs into higher selling prices. Again, given that just about every measure of consumer inflation -- with or without energy prices -- is on the rise, it would seem that, in fact, some businesses are passing through their higher production costs. And for those that cannot yet do so, Greenspan aims to help.
How's that? Well, he is busy aiding and abetting the creation of broad money at a rate not seen in this country since the early 1970s. As the chart shows, in the four months ended April, the nominal M-3 money supply has grown at an annualized rate of 15.27%.
The creation of all this money, which is a byproduct of the creation of credit, will stoke nominal demand for goods and services in general. This increased demand will then allow more businesses to pass through their increased costs of production to selling prices.
If the central banker of the world's reserve currency is not concerned about inflation given the facts on the ground, then holders of fixed-income assets denominated in that reserve currency ought to have more than the usual amount of anxiety.
Paul Kasriel is director of economic research at Northern Trust Co. This article is adapted from his June 4 "Daily Economic Comment." |
