Inflation remains quite low: Over the 12 months ending in December, prices for all the goods and services purchased by households increased by only 1.2 percent.
He did mention the pesky problem of inflation in some of those “non core” things that we spend money on:
We have recently seen significant increases in some highly visible prices, notably for gasoline. Indeed, prices of many commodities have risen lately.
Ben made it clear to me (and the market) that he was not going to slow down QE2. The monetary pedal will remain stuck to the metal:
We will review the asset purchase program regularly in light of incoming information and will adjust it as needed to promote maximum employment and stable prices.
Bernanke continues to sell QE on the basis that inflation is too low. He was very specific in his definition of inflation. I’ll repeat his words from above:
Prices for all the goods and services purchased by households increased by only 1.2 percent.
Bernanke is using the CPI to defend QE. The CPI is the wrong measure for many reasons. Not the least of them is hedonics pricing.
The definition for hedonic is “relating to pleasure”. That sounds good, but when it comes to the CPI hedonics creates big distortions. The most common example is with technology. Consider an Apple computer.
In 2006 it cost $2,499 to buy a 15-inch Mac Book Pro with a 2.0 GHz processor. Five years later you can buy a 15-inch Mac Book Pro with a 2.53GHz processor for only $1,999. Adjusted for inflation and considering the increased capacity of the newer Apple the actual cost of “pleasure” has fallen by more than 30%.
When you add in one component of the index that is “falling” in value at a rapid pace and add it to another item that is actually rising you get an index that says that prices aren’t going up. Absolute hogwash.
Ben actually understands that weird things like hedonic pricing models distort CPI as a measure of inflation. He chooses to use this statistic as it supports his QE policy. He’s wrong and he knows he’s wrong. But the head of the globe’s central bank keeps blowing smoke at the press and lying to the public.
The good news is that the bond market is not buying into Bernanke's spin. At the moment that is the only crowd that counts:
Articles on this topic:
WSJ
Andrew Biggs
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ReplyDeleteBen has to keep on buying. If he stops government crowding out will occur and interest rates will go up. That's how the market handles inflationary expectations.
ReplyDeleteThen Ben isn't much for free markets ... he likes his manipulated.
You didn't mention as to why is hedonistic modeling was hogwash -- only that it was.
ReplyDeleteWell, as Assange put it: That which is asserted without evidence, can be dismissed without argument.
John Williams has extensive and scholarly work on this subject on his website generally: (shadowstats.com) and specifically: http://www.shadowstats.com/article/special-comment
ReplyDeleteOn top of his objections I would like to add that hedonics is often backwards. MANY things decline in quality -- my last house was built in 1849 and had 4 (huge) brick chimneys, maple floors, a slate roof and details beyond what you would find in a more recent luxury home.
Even hedonics applied to advancing technology can be misleading. My old Panasonic printer weighed 60lbs and was full of precision parts -- my newer printers tend to be plastic wonders that can print in color with good image quality. That is not an indication of an improvement in my standard of living or a decrease in my cost of living. After all we are trying to measure the value of our money not the performance of our hardware.
-Edward Jaffe