The sound of inflation

Janet Yellen dismissed the rising inflation numbers. They were “noisy”, she said.

She didn’t like the sound of them. Valid numbers are harmonious. Invalid ones are cacophonous.

But after so many years of listening to such loud noise coming from her own colleagues, poor Ms Yellen may be tone deaf. At least, that is one explanation for her nonchalance towards the threat of inflation.

As we pointed out yesterday, the titanic US markets glide over the smoothest roads in nearly a decade. The bumps and potholes seem to have disappeared. The Vix, which measures volatility, shows little fear. Portfolio protection is as cheap as it’s been in the last quarter of a century. The S&P has not moved as much as 1% on any trading day in the last 45. Investors themselves no longer lock their doors or even put on their seat belts.

The Fed pushes down interest rates. With such cheap money available, people find ways to put it to use. Speculations, lifestyle enhancements, silly and worthless projects.

One of the main uses of corporate debt has been stock buybacks. Even start-ups are buying their own stock as soon as the post-IPO lock up period is over. Our jaw drops open at the thought of it. A start up, that can’t think of anything better to do with cash than buy itself? But if you aren’t staggered by that, here’s another of the sort of financial grotesquery that has become so common: central banks themselves are beginning to speculate on stocks, too.

The whole hullaballoo is so remarkably cockeyed, it deserves further commentary. The banking cartel – with special permission from government – creates money. The money is fed to favoured borrowers on favoured terms. Corporations, with low borrowing costs, use the money to buy their own shares. And the central banks themselves – searching for the yield they’ve denied real savers – use their ill-gotten cash to buy more stocks! Who can be opposed to it?

With so much cash pushing them forward, and the soft cushion of central bank guarantees trailing behind them, is it any wonder that stocks move higher and higher?

Still, there are always a few things that could wreck this programme.

China could collapse in a crisis. War could break out in the Middle East or in Eastern Europe. The stock market could tumble, for no particular reason. Central banks might lose control of interest rates – at the long end of the curve. Bonds could fall. Who knows?

But the most obvious risk is money itself. Money that comes ‘out of thin air’ might someday go back whence it came. The dollar could fall against foreign currencies. Or, it could fall against the goods and services it is called up to purchase. Either way, it could send the sleek touring car into a ditch.

That is why the measure of inflation is so important. If consumer prices are actually rising faster than the authorities say, it means two important things.

First, GDP is not growing. Nominal GDP growth is adjusted to inflation. More inflation, less growth.

Second, the real cost of borrowing is much lower than we think. If inflation is higher, the real interest rate is lower.

So what’s the story? The Fed says 2% is the right number for consumer price inflation. MIT’s Billion Prices Project puts it at 3.91%.

And since 2000, the government says consumer prices are up 39%. Trouble is, we can’t find any significant price that is actually up so little.

Oil is up 314%. A dozen eggs rose 106%. College tuition is up 68%.

The typical house has risen 50%.

Is this noise too?