Dear Fed: What’s Up with Inflation?

The Fed chair, Janet Yellen, today indicated that they didn’t think that asset values were outside the normal range of valuations. However, I would like to point out they said the same thing in 2008 and also in 2000.

We have two consumer inflation measures. The first one is a consumer price index, which is what consumers pay for goods and services. Headline inflation on that measure is one point one. The core rate is two point three percent. Way above the two percent target.

The personal consumption deflator that they use as one of their guideposts is based on consumer price data with a different weighting scheme. Right now that’s about a one percent headline and about one point seven percent on the core. They tend to focus on the core trends because that’s where the headline will eventually be, and so you’re a little bit above on the CPI and a little bit below on the PCE, but within shouting distance of two percent. Okay.

The other thing to keep in mind, is that the Federal Reserve or central banks in general, can create inflation. But the marketplace determines what kind of inflation you are going to get. And that means that based on the growth of the different sectors, based on the desires and wants of the consumers, you can see inflation in the service sector or the goods sector, or for example in the housing market. Right?

Central banks do not include housing inflation in any of their measures today. They used to. And most of the inflation today, around the world, is in asset markets, particularly housing. You have some areas in the world that have zero inflation as reported by a consumer price index yet fifteen percent annual gains in housing. So it’s very inconsistent, and unfortunately we just lived through this asset bubble in the past, and to me central banks are still not looking where the inflation is showing up. Both here, in the United States and around the world, it’s in the asset markets.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.