Wikinvest Wire

Inflation Has Been Close to Zero

Friday, November 04, 2005

The inflation rate, properly measured, at this particular stage, has been very close to zero for a very long period of time.
Alan Greenspan, November 3, 2005

Fed Chairman Alan Greenspan, set to retire in just a few months, made a final appearance before the Joint Economic Committee in Congress yesterday, stating that despite hurricanes Katrina, Rita and Wilma, the economy is continuing a healthy expansion.

"These events are likely to exert a drag on employment and production in the near term and to add to the upward pressures on the general price level. But the economic fundamentals remain firm, and the U.S. economy appears to retain important forward momentum."
He warned that given current spending and entitlement plans, the government may have already promised more than it can deliver to baby-boomers, set to retire in the years ahead.
"We owe it to those who will retire over the next couple of decades to promise only what the government can deliver. The present policy path makes current promises, at least in real terms, highly conjectural. If fewer resources will be available per retiree than promised under current law, those in their later working years need sufficient time to adjust their work and retirement decisions."
Once again, the prepared remarks offer little in the way of news - the headline "Greenspan warns Congress on deficits" seems to have been playing in a continuous loop for the last few years with little effect (pay no attention to the recently rosy White House budget predictions, things are about to take a turn for the worse).

The only real news during yesterday's appearance was during the Question and Answer session, which, as we've seen before, often provides interesting insight, yet does not seem to get much attention from the mainstream financial media.

Early on in the Q&A session, it is revealed that the yield curve is no longer a useful indicator of the future health of the economy. More specifically, if the short-term interest rates controlled by the Fed (currently at 4 percent) are pushed upwards past the long-term interest rates controlled by the bond market (currently near 4.5 percent), this should not be interpreted as an indication that a recession will follow.

So, despite having been the most reliable indicator of upcoming economic weakness in recent decades, it should no longer be viewed that way.

This has been mentioned on several occasions in recent months as long-term rates have failed to move upwards after repeated hikes to the short-term rates - part of the "conundrum".


A short time later came this exchange with committee chairman Jim Saxton:
Saxton: Given the need for the Fed to preempt inflation, to what extent is the Fed now addressing inflationary expectations or fears that may not be fully evident in the current available data.

Greenspan: Inflationary expectations are reasonably well measured, concurrently, and in real time. In a sense, we pick it up from a variety of different sources but mostly from the structure of interest rates, very specifically, the differences between interest rates that are defined in real terms such as the TIPS (Treasury Inflation Protected Securities) and what we call additional compensation required for inflation.
So, long-term interest rates (relative to inflation protected Treasuries) are still useful for setting "inflation expectations", but long term interest rates (relative to short-term rates) are no longer useful for setting "economic weakness expectations".

Seems kind of arbitrary doesn't it? It's as if once the data starts yielding a result that you don't like you discredit it.

So why not discredit long bond yields in their role as an indicator for "inflation expectations"?

Just wondering.

Mrs. Maloney then asks an interesting question, one which many of us have been asking:
Mrs. Maloney: The question that my constituents ask me, I'm going to ask you, "If the economy is so good and inflation is so well behaved, and there's price stability, then why does everything cost so much more when you go to buy something?" They're feeling pressures in their lives and the question I hear from my neighbors and friends and constituents is, "When we have so many economic indicators that are unhealthy, how are we having a healthy economy?" ...

Greenspan: ... The reason people are seeing, think they're seeing, prices rising is that they are. They're seeing them, however, for a lot of petroleum related products. The one statistic that everyone is able to audit is the price of gasoline. It's a homogeneous product and it's listed up there on the signs at service stations all the time, and that needless to say has been fluctuating all over the place. But, the Bureau of Labor Statistics does an excellent job in trying to truly get what is the structure of price change in this country, and those data from the BLS, are as best as we can do.

So I think that it's mainly a selective view ... is what people often see in a period like this. But when you look at all of the data, it doesn't show the concern of acceleration, that I often hear as you do.
Well there you have it - do not be concerned about rising prices because when looking at all the inflation data, these rising prices are just not showing up. When the rising prices show up in the inflation data, then that will likely be cause for concern, but until then, everyone just relax.

When asked by Ron Paul why a 1987 dollar is now worth only 55 cents, and if we are cheating people who save money:
Greenspan: Well Congressman, I think the first thing that we have to recognize is that the inflation rate, properly measured, at this particular stage, has been very close to zero for a very long period of time. In other words, as I said earlier, those numbers (the Consumer Price Index) are biased upwards; because of the way we calculate it.

So, while it is true that a number of statistics you quote go back well before the inflation rate stabilized and are reflecting very substantial inflation pressures that existed, especially in the 1970s when the inflation rate was double digit, but the level of nominal GDP has gone up roughly the same, after certain kinds of adjustments, with what the real underlying GDP, properly measured, would have done, and that tells me that we are not unduly inflating the system.

Paul: Well, I don't think that reconciles with the facts that I can get from the Federal Reserve that shows that our dollar is worth 55 cents compared to 1987. If that's not the reverse of what you see in rising prices and inflation, my dollar just doesn't buy as much anymore and the trend is continuous since 1914, so I don't see how you can say there is no inflation.

Greenspan: You and I have discussed this issue at length many times over the years, and I agree with you in part, but I disagree with you in the other part.

Paul: Can you say anything favorable about gold?

Greenspan: I'm sorry?

Paul: Can you say anything favorable about gold today?

Saxton: The gentleman's time has expired, and we're going to go now to Mr. Hinchey.

Hinchey: Mr. Greenspan, I just want to say that we are going to miss you - really miss you. I think that you've probably been one of the most effective chairman in the history of the Federal Reserve ...
In the long history of Alan Greenspan vs. Ron Paul, it appears that it's going to end up as a draw. As seen here, here, and here, it seems there is so much more for these two to talk about. Will they ever get togethor over drinks and settle their differences?


Iowan said...

The only inflation Greenspan (and the capitalist thugs who employ him) care about is the cost of labor. As long as wages are stagnant or falling they're happy. Otherwise, higher prices just mean higher profits.

Anonymous said...


I am curious on your thoughts of Greenspan's effect on manufacturing jobs in the country. Is he responisble for turning our country in a service economy or was outsourcing inevitable?

Also, what happened to the father working and the mother staying home to raise the kids? Is Greenspan responsible for 2 incomes to buy a house?

SirChive said...

Please explain to me Mr Greenspan how the cost of my gas can be so much higher, the cost of my medical and dental can be so much higher, the cost of my electricity can be so much higher, the cost of my basic groceries can be so much higher, the cost of eating out can be so much higher (I could go on and on) when your measurement of inflation is close to zero.

Rich political hacks and con-men like Greenspan and Bush make me puke. Their world view stretches to their rich buddies and that is it.

john_law_the_II said...

(Is he responisble for turning our country in a service economy or was outsourcing inevitable? )

with relentless inflation created by the Fed, the cost of establising a company and hiring workers in our nation has risen and risen and rise. decade after decade costs rise, to compete the business must move to the lowest costs countries.

who would wanna start a business in California right now?

Anonymous said...

Oh, come on.

You people need to get your facts straight.

First of all, the Kohnheads only set monetary policy for Remulak. On Remulak, they don't use gas. On Remulak, they don't eat.

Yet, all I hear from you bellyachers is how inaccurate the inflation statistics are "ex food and energy." Of course the inflation statistics are accurate. The government doesn't lie.

And all those political comments about how a dollar is only worth 55 cents -- give me a break. Of course a dollar is worth a dollar. It says so right on the front.

Plus, I heard Bush is going to give Greenspan the medal of freedom. That settles it. Greenspan is a hero, and there is nothing any of you can do about it.

So, nyeah.

Anonymous said...

Some interesting comments about Volker, Greenspan, Bernanke, and inflation targeting here:

cm said...

To paraphrase Clinton, "that depends on what 'very close' (and 'period') means".

cm said...

SirChive: Let me explain this to you. You are seeing inflation because you are not buying enough computers and cars.

Seriously, the last two times I bought a 50-pack of CD-Rs (1+ year apart) of the same brand name, they cost me $20/$10+tax, respectively. I made the joke that depending on whether it is an arithmetic or geometric progression, they should cost me either $0 or $5 this year. Sure enough, I saw an ad for $5 this week. (Which means it is geometric.) A coworker remarked he saw an ad for "free after mail-in rebate". So the jury may still be out.

So if you are getting a bunch of these after each doctor visit, you may neutralize your personal inflation.

DWPittelli said...

Greenspan isn't fudging the CPI figures, but he may be disingenuous about the current situation. Comparing the end of 1986 to September 2005, the old dollar is worth 55.58 cents, close enough to Paul's comment. On the other hand, this works out to a modest 3.2% inflation rate for the 18.75 years in question, with the higher rates in the first 4 years, and a 2.7% average for the subsequent years. That said, the September to September year-over-year is now a 4.7% gain. Yes, mostly due to energy, but these "All Items" numbers are more real than just excluding the energy figures, if you keep in mind that we get energy prices updated more frequently than most others, and since September prices of gas etc. are down.

I think a lot of the criticisms of Greenspan are inapt (i.e., that he allows inflation to suit his corporate masters), because in fact capitalists would generally prefer a harder line on inflation (tighter money), and debtors prefer a looser monetary policy (going back before Bryan's "Cross of Gold" speech, and even Shays' rebellion).

CPI-U All Items
Year Dec. $ Dec/Dec
1986 $55.58
1987 $58.05 4.4
1988 $60.61 4.4
1989 $63.43 4.6
1990 $67.30 6.1
1991 $69.37 3.1
1992 $71.38 2.9
1993 $73.34 2.7
1994 $75.30 2.7
1995 $77.21 2.5
1996 $79.78 3.3
1997 $81.14 1.7
1998 $82.44 1.6
1999 $84.66 2.7
2000 $87.53 3.4
2001 $88.88 1.6
2002 $91.00 2.4
2003 $92.71 1.9
2004 $95.72 3.3
2005 $100.00 NA

keith said...

Inflation close to zero and there is no nationwide (or worldwide) housing bubble

Is this guy going senile? Or does he feel he cannot tell the truth, as to cause a meltdown (as if he could avoid one now)

Wes D said...

Good post, check out my blog

I'm also a little bearish on housing because I don't think this demand is sustainable.

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