Raising interest rates with zero inflation is a hard sell

Yahoo Finance ^ | Wed, Aug 5, 2015 | Mike Dolan

[expat_panama]

LONDON (Reuters) - Americans and Britons bracing for their first interest rate rises in almost a decade are puzzled: why are rates about to go up when there's no inflation?

Both the Federal Reserve and Bank of England are proclaiming that they are on the cusp of raising interest rates for the first time in almost a decade. It may take a few months, but the message they are sending still heavily-indebted households either side of the Atlantic is clear: 'be warned'.

It's not hard to see why near-zero interest rates should be 'normalized' when you do a quick economic health check.

After years in the post-credit crisis doldrums, both economies are now growing at brisk annual clips of between 2 and 3 percent. Jobless rates are near long-term averages of less than 6 percent. Real estate and financial asset prices have raced higher over the past couple of years.

The problem is that annual consumer price inflation rates are zero in Britain and just 0.1 percent stateside, far below the 2 percent consumer price growth targets both have committed to in one form or another as a policy guide.

Even the Fed's favored inflation measure - the index of personal consumption expenditures (PCE) - is running as low as an annual 0.3 percent.

The policy mantra for much of the year has been that headline inflation was artificially depressed by the collapse of energy and raw materials prices in late 2014. Once these stabilized - as they did through the spring - then the assumption was these base effects would wash out of CPI indexes and reveal far livelier 'core', largely domestically driven, price rises pushing headline inflation back toward its target.

In other words, central banks would face down what they saw as a temporary drop...

[agere_contra]

The Fed don't care about stable prices. They pretend that price inflation is 2% and they pretend to target that. If they actually wanted price stability wouldn't they target 0% price-inflation?

Also: the Fed are not going to raise rates. They might put up a notional 20 bp rise just to pretend that everything is OK: however in reality they are preparing for the next round of QE. That's if they're not already carrying out QE using national surrogates like Belgium to buy USTs.

ShadowStats measures price inflation using the same methods that were used in 1980. They make the US inflation rate about 6 or 7% per year.

Modern hedonic systems of inflation-measurement that offset cost with increased notional value and that ignore expenditure on essentials (such as food and energy) are simply not meaningful.

[Georgia Girl 2]

Some areas are doing well. Overall not so much.

[moovova]

“...they are on the cusp of raising interest rates for the first time in almost a decade.”

They’ve BEEN on the cusp of raising rates for a decade.

Not to mention, a decade ago would’ve been THE appropriate time to raise mortgage rates to slow the housing bubble.

[expat_panama]

Does anyone believe that inflation is at or near zero? Not me.

Faith and belief are wonderful things.

They show a path for our lives and we work in the market place so we can feed our families and live our lives in the path our faith and beliefs point.  We can't let our money rule our faith and we should never let our beliefs completely rule our market decisions. 

How about we list item prices over time, add up a basket of purchases to get a handle on general prices etc,   Yeah, everyone here just wants 'belief' and 'faith' but here goes food:

Year	Flour (5 lbs)	Bread (lb)	Round steak (lb)	Bacon (lb)	Butter (lb)	Eggs (doz.)	Milk (1/2 gal.)	Oranges (doz.)	Potatoes (10 lbs)	Coffee (lb)	Sugar (5 lbs)
2015	$2.63	$1.44	$6.18	$5.47	n.a.	$2.09	$3.50¹	$1.19²	$6.46	$4.91	$3.30
2011	$2.75	$1.48	$4.69	$4.82	$3.67	$1.95	$1.86	$6.00	$7.35	$5.65	$3.51

Anyone else want to do energy, wages, iphones, etc. etc.?

 

[agere_contra]

Agreed! They're never going to raise rates.

Well, perhaps 20 bp as a one-time deal, just to pretend that the economy has taken off. But a real hike? There's no chance whatever.

When the stock market crashes in September we'll have QE again.

[BfloGuy]

The real problem is that we allow the government (through the Fed) to fix the rate of interest at all.

[moovova]

“Have you bought a half gallon of Breyer’s Vanilla ice cream lately?
The price is the same but the container is no longer a half gallon size.”

Oddly enough, our local BJs Warehouse has started selling half-gallon size Breyers. They had been selling two 1.75 gallon containers banded together. It was a shock to see a half-gallon size again. I forget the price of either offering but remember the prices seemed reasonable compared to a regular grocery store. Of course, we never bought Breyers at the grocery store unless it was on a deeply discounted sale.

[TomGuy]

Ice cream is sort of like coffee, regarding the packaging.

I noticed the 1/2 gallon became 1.7 qts and then 1.5 qts.

I recall when a 3-lb can of coffee was actually 48 oz. Then, it dropped to 42 oz. Then, 34 oz. Now, 27 oz.

==

I joke that local stored had to buy new shopping carts with a smaller distance between the slats because too many products were falling through the old cart slats due to product shrinkage.

[ChildOfThe60s]

Gas prices HAVE gone down, but grocery prices are way up. ......rents & property taxes continue to increase.

And we know that gas will go back up, nature of the product. We also know grocery prices will not go down.

My property taxes go up nearly every year. I'm betting that they don't figure into the CPI. We have an unelected "library board" that raises our property taxes for the country library system EVERY year (always for the children!) and we are not allowed to have a public hearing on that unless they want to increase over about 25%. One year I raised hell in the local paper & legally demanded a public hearing when they were going up 25%. They promptly dropped the increase to 24% and cancelled the hearing. FU taxpayer.

Kentucky has a weird law that allows local unelected taxing authorities to raise taxes a lot without any hearing or say so by the public. It's called "the compensating rate". They can raise the tax rate to any % necessary to get up to 4% *more revenue* than taken in the previous year. So when the tax base shrank because of the economy, that meant a 24% rate increase for those remaining taxpayers in order to get the country their 4% increase in total revenue. IOW, our local rulers are guaranteed by the state to get at least 4% more total revenue every year regardless of how bad things are for we the taxpayer. Talk about entitlement!

[CJ Wolf]

Nope no inflation.

[expat_panama]

we allow the government (through the Fed) to fix the rate of interest

They got a lot to do w/ the bank overnight rate but that's about it.  The free market sets most other rates which may or may not follow suit.  The reason congress decided to have the Fed do the bank rate is to have a bit of control over money in the U.S. --it's how congress complies w/ Article. I.Section. 8. of the Constitution "...coin Money, regulate the Value thereof..."

[moovova]

“When the stock market crashes in September we’ll have QE again.”

I hope not. But in the previous housing bubble, home prices were rising so fast, many buyers were left out because wages didn’t keep up. Everybody wanted to buy a home though. Even Earl & Wanda, living out of their car in the Wal-Mart parking lot, decided to go for it.

Enter the funky financing arrangements needed to get the unqualified into a house...zero down, 125% LTV, stair-step interest loans, no doc/slim doc loans, slice & dice subprime mortgages, etc...

Rates are still that low...and we know where that got us last time.

[moovova]

Correction...” They had been selling two 1.75 gallon containers banded together. “

Should’ve been two 1.5 gallon containers.

[rbg81]

That’s interesting. I have never seen my property taxes go down. Never.

[rbg81]

A 25% increase in one year is outrageous. Around my way, we had taxes go up 6% in a row for a few years. People were steaming mad. They must have gotten the message, because increases in the last 3 years have been miniscule. But the damage has still been done. Like I said, my property taxes only go up.

In fact, my property taxes are now more than my mortgage payment was for my first house.

[Georgia Girl 2]

Ours have gone down a couple of times in the past 6 years.

[rbg81]

It is weird because some things are deflationary, but others are inflationary. Note that anything Government touches (taxes, health care, education) are Inflationary.

[Lurkina.n.Learnin]

Pretty good article on oil prices here

Don’t Be Surprised If Oil Prices Hit $20
http://www.freerepublic.com/focus/f-news/3320883/posts

[Georgia Girl 2]

Yes its a little confusing. We live in strange times.

[Ohioan]

The writer has it all upside down. Interest rates have been artificially held down by "Quantitative Easing." Without getting into the question of whether this unnatural situation is justifiable, under either the present circumstances or any circumstances; his second implied premise--that there is no inflation, because there is little (measured) price inflation, being reported, is also upside down.

That quantitative easing has resulted in very considerable monetary inflation. The effect of that monetary inflation has been masked by a build up in Corporate reserves, some of them required by sensible regulations resulting from the aftermath of the 2008 debacle; but the price inflation figures, also are understated.