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...

[Lake Living]

I remember when Mad Magazine did a spoof on the shrinking candy bar sizes. One of their cartoons had a girl opening up a package with a tiny little candy bar falling out about 1/10 the size of the wrapper.

[Flick Lives]

I don't pay any attention to gold prices. But I do pay attention to grocery prices - and the idea that we're not seeing inflation is laughable.

Bingo. It's like I need a mortgage if I want to purchase a piece of steak.

[Flick Lives]

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.

The size of the plastic bags for packing the groceries seem smaller than I remember too.

[DHerion]

No inflation? The stock market bubble is an indication of inflation...that’s where the 0% interest rate money has gone. Normal consumer inflation is way higher than the Feds say. They state 1% inflation or under, but food prices, medical costs, rents, higher education have all gone much higher - 3-10% higher depending on the category. Dr Goebbels could not do a better job of propaganda than Washington.

[Oatka]

Where prices have not risen on many products, product reduction has occurred. The size/weight has decreased while the price stayed the same.

AKA "Packaging to price" - TP from COSTCO one year apart:

[expat_panama]

...implied premise--that there is no inflation, because there is little (measured) price inflation...

That would be at odds with the FR meme that there is in fact plenty of inflation that is not and can not be measured becuase everyone simply says it's there.  Everyone feeeeels it.

...considerable monetary inflation...

When most people talk about inflation with regard to money they're talking about prices.  When they talk about the monetary supply getting bigger they say well, it gets bigger.  From the beginning of the recession to now the money supply's expanded by over $5T --68%, while over all observed actually transacted prices in general have only gone up 13%, that's a tad over one percent/year.   The reason we got lots of money w/ little change in prices is nobody's spending their money --money velocity's in the terlet.. 

We're talking about over $5T being socked away here and not just the penny-ante half $T that corporations are sitting on.  imho if the Fed hiked rates now then we'd probably see a lot more than just $5T taken out of circulation.

[expat_panama]

Neat! imho, while that may be hard on one or two econ sectors, over all it’s a big bonus.

[Toddsterpatriot]

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

As you can see, they started raising rates in 2004 to burst the RE bubble.

[moovova]

Yes. But 30 year mortgage rates stayed in a rather narrow range...5% to mid-6% (maybe upper 6’s briefly) and then came back down.

[Toddsterpatriot]

The Fed doesn’t control mortgage rates.

[moovova]

I understand.