Whatever Happens With ‘Inflation,’ Don’t Cheer/Jeer the Fed for the Outcome

It was reported last week that the January Consumer Price Index (CPI) rose .5%, which was up from the previous month. So while the number is falling, some think the .5% jump versus .1% the previous month signals something amiss?

More realistically, we’re all central planners now. Seemingly lost in all this fretfulness about one calculation made by bureaucrats who measured their own chosen basket of goods is that prices are how a market economy organizes itself. In which case, how dangerous it is for the Fed, the Biden White House, Congress, or any other entity to focus on specific increases or decreases. Figure that prices move up and down all the time to reflect changes in consumer habits, a new product or service that replaces what consumers have long relied on, supply constraints born of global lockdowns overseen by panicky politicians, and so much more.

It’s also worth pointing out that a rising price of one good or several goods logically signals falling prices elsewhere. Economics is about tradeoffs. If a pack of chicken breasts costs $15 when it used to cost $9, that means buyers of chicken have 6 fewer dollars to buy things.

Lastly, it’s useful to point out that with measures like CPI, “inflation” can be whatever those measuring want it to be. Depending on the basket of goods, prices can be soaring, flat, or plummeting. See above: bureaucrats.

Seriously, a focus on prices signals a lack of seriousness about actual inflation. Put another way, to say rising prices cause inflation is like saying suntans cause the sun to shine. Causation is plainly reversed, not to mention that prices can rise for all sorts of reasons that have nothing to do with what inflation is: currency devaluation. See above, yet again. The use of CPI to divine most anything is a tad juvenile.

Still, if it continues to fall watch for economists and pundits to cheer the Fed for “tightening” credit and so-called “money supply.” They’ll say as they often do that the Fed brought down inflation, or that “a late to the inflation party” Fed brought down inflation. No. Such a view presumes a closed U.S. economic shop that doesn’t exist, and never has.

Economists Steve Hanke and John Greenwood are already commenting on the Fed as the cause and solution to inflation. In a recent piece for the Wall Street Journal, they first claimed they predicted today’s “inflation” long ago via their focus on so-called “money supply.” They then cited all sorts of monetary aggregates with an eye on convincing readers that they saw around the proverbial corner. The advice here is to reserve your greatest skepticism for those who claim to have predicted most anything.

In consideration of now, to have predicted the higher prices of today that some view as evidence of inflation, Hanke and Greenwood would have had to predict ahead of March of 2020 that much of the world would fight a spreading virus with economic contraction that resulted in soaring global unemployment and the near-term evisceration of the very global cooperation that pushed prices so low in the first place. Greenwood and Hanke predicted no such thing.

Of course, they’ll claim that they saw rising “M2” and other “money supply” aggregates flashing red way back when, but such thinking is backwards. To say that governments or central banks can increase “money supply” is like saying they can increase production. They can’t. Central planning was an abject failure.

So-called “money supply” is a consequence of production. Nothing else. That’s why there’s lots in Chicago, IL, and very little in Cairo, IL. Hanke and Greenwood give the impression that governments can just increase it, but money has no purpose where there isn’t production, and it’s everywhere where there is production.

Crucial, however, is that producers don’t just exchange with any currency. This is notable with regard to the dollar. If dollars in circulation rose at the time that Hanke and Greenwood were claiming to notice “inflation,” the latter would likely signal a lack of dollar devaluation. Producers are exchanging products for products, and they prefer good money to referee their exchange. This explains why the dollar factors in so much global trade. Its rising usage signals the opposite of inflation. Please read on.

That the dollar is the global currency of choice is a reminder of what the Fed focused ignore. Money flows in the “closed” global economy to where there’s production, and wholly without regard to the doings of central bankers. This rates prominent mention as the Fed focused claim that a “tighter” Fed has shrunk so-called “money supply,” or credit in the U.S. It can do no such thing much as global central banks can’t keep dollars and dollar-denominated credit out of their countries. Whatever the Fed presumes to take from the U.S. economy will be made up for by global credit flows within seconds. If we ignore that rising credit isn’t inflation as is, the Fed can’t limit the latter.

Most of all, the Fed doesn’t control the dollar’s exchange rate, nor has it ever. This is important simply because if there had been an inflationary breakout in recent years as opposed to rising prices born of lockdowns, we would have seen a falling dollar first. Except that until fairly recently, the dollar had been rising against both foreign currencies and gold.

Which is where we’ll end this column. More recently, we’ve seen the dollar falling against the objective measure that is gold, and foreign currencies. All amid aggressive Fed “tightening.” Which means even if you believe the Fed can whip inflation with rate hikes, the dollar has actually been falling amid the hikes. This is an inconvenient truth for those who think the Fed’s actions have begun to arrest what they incorrectly imagine inflation to be.