Hi Pezz, <<... I ain't so sure ... inflation can be totally laid at the feet of the FED>>
No, of course not totally. I believe our last main series of discussion eventually settled on inflation, or the lack there of, as a possible trigger for the next accident.
The debate is happening elsewhere as well ...
grantsinvestor.com
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A FED CELEBRITY DEATH MATCH?
by James Padinha 07:00 AM 06|15|2001
When Greenspan and Meyer spar over inflation, someone may lose an ear.
It smells like a fight to me. In the near corner, just out of his warm bubble bath and wearing the powder blue trunks is Fed Chairman Alan Greenspan. And in the far corner, sporting the solid black trunks, is Fed Governor Larry Meyer. Being neither prizefighters nor kings, these guys aren't battling for money or for a come-hither woman named Helen. They're central bankers -- so, of course, they're fighting about inflation. Ladies and gentlemen, are you rrready to rrrumble?
The Tale of the Tape, so to speak, gives a sense of each fighter's thoughts about inflation, present and future.
In a May 24 speech, Meyer said this: "Given that labor markets remain tight, that inflation remains above the rate that I would find acceptable over the longer run, and that core inflation has been edging higher, attention must also be given to calibrating the easing to avoid overshooting in the other direction in a way that ends up adding to price pressures as growth strengthens." In a June 6 speech, he stressed the latter point again: "We have to be concerned that as we ease to mitigate the risks of a persistent slowdown or recession, we do not, at the same time, create conditions that would lead to higher inflation as the expansion gathers momentum."
Meyer's stance, then, is clear: He thinks overall inflation is already too high; he acknowledges that core inflation has been edging higher; and he cautions that too much easing might lead to a bigger inflation problem down the road.
Meyer's thinking stands in stark contrast to that of Greenspan, who believes that inflation is contained and will stay that way going forward. In his May 24 speech, the chairman did note "some apparent deterioration in actual and expected CPI inflation," but he downplayed these developments by turning to a kinder inflation measure, the core PCE price index. "There has been little acceleration in the broader index of core personal consumption expenditure prices," he declared.
Greenspan also argued that "the lack of pricing power reported overwhelmingly by business people underscores an absence of inflationary zest." He went on to forecast: "With energy inflation probably peaking and the easing of tightness in labor markets expected to damp wage increases, prices seem likely to be contained." Sound familiar? That's because the phrasing resembles the Fed's statement from the May 15 FOMC meeting: "With pressures on labor and product markets easing, inflation is expected to remain contained."
Finally, in a June 4 speech to the International Monetary Conference, Greenspan reiterated his views on the current inflation picture: "What we see. . . at this moment is a very extraordinary lack of pricing power in the American economy, which means, in effect, that the cost increases are not following through into significant pressures on prices but rather on profit margins."
In sum, then, Greenspan's view -- and hence the Fed's official view -- rests on the notion that inflation is already contained, and that mass firings, slower economic growth and a lessening of energy inflation will keep the lid on in the future.
Now that these two heavyweights have thrown a few jabs, how do we score the fight? Although the bout is still in the early rounds, Meyer is ahead on my card -- not because he's inflicted a lot of pain, but because Greenspan's punches have been so feeble. In fact, the big guy's emphasis on the core PCE price index makes him seem like he's gasping for air. Sure, that index is rising at only a 1.7% year-over-year rate, but during the first quarter, it posted the biggest increase (2.6%) we've seen in six years. Then, too, other price measures confirm that the inflation trend is still headed up.
The CPI, for example, rose at a 3.8% annual rate during the first four months of this year, compared with a 3.4% increase for all of last year. Remember, too, that last year's increase went into the books as the biggest since 1990. The core CPI, meanwhile, rose at a 3.3% annual rate during the first four months this year, a direct result of acceleration in the indices for shelter, medical care and tobacco and smoking products. The core CPI rose 2.6% last year, making it the biggest increase since 1996.
Finally, the Cleveland Fed's median CPI, another core consumer price measure, has accelerated steadily from the trough reached late in 1999. After grinding higher all year, this gauge is now rising at its fastest year-over-year rate since January 1996.
These accelerations might not qualify as "inflationary zest," yet one wonders if Greenspan needs a dose of smelling salts when he speaks of "the lack of pricing power reported overwhelmingly by business people." An acceleration in inflation, by definition, means not only that prices are rising, but that they are rising at a quicker pace than they were earlier.
Maybe Greenspan only talks to business people who manufacture clothes and new vehicles and computers, or maybe he talks to all kinds of business people who just plain lie to him. After all, how many businesses make a practice of shouting to the world, "Yes! we're raising prices"?
In any event, the acceleration of inflation measures confirms that many companies out there do have some pricing power and are, in fact, raising prices. So I'm subtracting a point from Greenspan for a low blow.
I'm subtracting another point for failure to separate -- that is, for clinging desperately to "easing pressures on labor and product markets" as an inflation damper. Pressure in the labor market has been easing for more than a year now -- employment growth peaked in May 2000. What has wage growth done since then? It has accelerated. The year-over-year increase in average hourly earnings speeded up to 4.2% from 3.4%. Wage growth in the service sector accelerated to 4.6% from 3.4%, and even wage growth in the goods sector jumped to 3.9% from 3.5%. Further, other measures of wage growth, such as those released alongside the productivity numbers, show increases of 6% and more.
That's why Meyer says "labor markets remain tight." We hear a lot about mass layoffs, and we know the current unemployment rate has risen to 4.4% from a cyclical low of 3.9% last autumn. Yet wage growth is still accelerating. Unfortunately for Greenspan, his easing-tightness-in-labor-markets notion packs no punch at all if it doesn't bring slower wage growth along with it.
The same goes for demand. What has inflation done since economic growth began to slow a year ago? As I detailed above, it hasn't decelerated or even leveled out. It has accelerated. Faster economic growth did not give rise to faster inflation during the latter 1990s. Indeed, that is the hallmark of the tech-led, productivity-driven "New Era." So if faster growth did not cause inflation to speed up, why is it, precisely, that slower growth will cause inflation to slow down?
Greenspan appears to be choking on his mouthpiece, while Meyer impresses the judges and the audience with solid jabs. He believes the kindly factors that helped keep inflation low in recent years have disappeared -- every last one of them.
Non-oil import prices? They were falling at rates greater than 4% less than three years ago, but now they're declining at just 0.6%. That's a swing of more than 3.4 percentage points. Energy prices? They were plunging at double-digit rates less than three years ago, but now they're rising at double-digit rates. Besides a change of direction, there's a 20-point swing. Oil prices? Down 44% less than three years ago, they're rising at a 9% rate now; a change of direction plus a 50-point swing. Health care prices? Rising at a rate of just 2.5% less than four years ago, they're shooting up at a 4.6% rate now. That's the fastest increase since 1995, and a two-point swing. Productivity? It was growing at 5.4% as recently as last year, but now it's growing at a 2.5% rate; a three-point swing. Unit labor costs? They were falling at a 0.5% rate as recently as last year, but they're climbing at a 3.4% pace now. That's a four-point swing plus a change of direction.
That's at least six good shots to the jaw. Now that Meyer has Greenspan in the corner where he wants him -- the kindly inflation factors are gone and core price increases have been accelerating as a result -- he can turn to the punishing body blows that lend his argument its power. He can refer to the fed funds rate, which has been lowered by 250 basis points in less than five months. He can use the real funds rate, which now stands at its lowest level (1.40%) since July 1994. He can bring in the M-2 measure of the money supply, which has now accelerated by almost two and a half percentage points, to 8.1%, in just nine months. Not since 1983 have we seen such money-supply growth. Bam, bam! Finally, Meyer can invoke the gap between the 10-year Treasury note and the three-month Treasury bill, which now stands at 169 basis points, its fattest since January 1995, and an indication that debt markets are more optimistic about the medium-term outlook for stronger growth and faster inflation than they have been in more than six years. Bam, bam, bam.
That's too bad for all of us, because a Meyer victory carries much worse consequences. If a bigger inflation problem emerges, the Fed will have to take back some, and perhaps all, of the easings it recently pushed through. And a higher fed funds rate won't help stocks or bonds.
Because he is a thoughtful, methodical and real-world fighter, Meyer has the edge over Greenspan, who seems to rely mostly on hope and who gives the impression of someone running around the ring with arms flailing, looking for a way out. So I pick Larry to win this fight -- and it won't surprise me if, at some point, Alan tries to bite his ear off.
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