Definition of inflation: Did Fed Make a Mistake

Did the Fed Screw up in raising rates

The Definition of Inflation: Examining the Fed’s Decision to Raise Rates

Bankers know that history is inflationary and that money is the last thing a wise man will hoard.

William J. Durant

Overview of Inflation

Inflation is a term that is thrown around frequently in the financial world, but few people understand what it means. At its most basic level, inflation is a general price increase over time. This can be caused by various factors, including an increase in the money supply, a decrease in the supply of goods and services, or changes in consumer behaviour.

Inflation can be both good and bad, depending on the context. In some cases, a moderate level of inflation can be a sign of a healthy economy, as it indicates that consumer demand is strong and that businesses are able to raise prices without losing customers. However, high levels of inflation can be a major problem, as they can lead to decreased consumer spending, reduced business investment, and other negative economic consequences.

Feds end game

There is an ongoing debate among economists and financial experts about the true nature of inflation. While the Federal Reserve has been working to create the impression that inflation is a significant issue, others, such as proponents of the hard money camp, argue that the true problem lies in increasing the money supply.

The Fed’s definition of inflation, which focuses on price increases, fails to address the root cause of the issue. In reality, inflation should be defined as an increase in the money supply, which can lead to rising prices as a symptom of this underlying problem.

By failing to address the money supply issue, the Fed may be exacerbating the inflation problem rather than solving it. Instead, experts suggest that policymakers should focus on limiting the growth of the money supply and encouraging responsible monetary policies.

This article from summarises this concept quite succinctly.

Inflation, therefore, means an increase in the amount of receipts for gold on account of receipts that are not backed by gold yet masquerade as the true representatives of money proper, gold.

The holder of un-backed receipts can now engage in an exchange of nothing for something. As a result of the increase in the amount of receipts (inflation of receipts) we now also have a general increase in prices.

Fed’s Decision To Raise

The Federal Reserve’s recent decision to raise interest rates has been a hotly debated issue, with some economists arguing that it could have negative consequences for the economy. One of the primary concerns is that the economic recovery has been fueled by “hot money,” and raising interest rates could upset this delicate balance.

Despite these concerns, the Fed has persisted in its hawkish stance, raising rates multiple times in recent years. However, recent comments from former Fed Chair Janet Yellen suggest that the central bank’s attitude may change. Yellen has acknowledged that current levels of inflation are below the Fed’s target of 2%, indicating that the bank may be more willing to tolerate inflationary pressures in order to support economic growth.


As she has in other statements recently, Yellen told lawmakers that she expects low inflation to be transitory. “Temporary factors appear to be at work. It’s premature to reach the judgment that we’re not on the path to 2% inflation over the next couple of years,” Yellen said. “As we indicate in our statement, it’s something we’re watching very closely, considering risks around the inflation outlook.” Full Story

Based on the factors we will list below, Yellen might have to wait very long before inflation hits the Fed’s target rate of 2%. We only need to look at Japan; they have been struggling to generate inflationary forces for decades. They continue to inject billions into the economy, hoping for change, but inflation remains stubbornly low.  Our economic recovery is not real; remove the easy money supply, and the economy will collapse.

Definition of inflation and Bill Gross

Gross said most destructive leverage occurs at the short end of the yield curve as the cost of monthly interest payments increases significantly to debt holders. “While governments and the U.S. Treasury can afford the additional expense, levered corporations and individuals in many cases cannot,” he said.

Since the Great Recession, more highly levered corporations, and in many cases, indebted individuals with floating-rate student loans now exceeding $1 trillion, cannot cover the increased expense, resulting in reduced investment, consumption and ultimate default, Gross said. “Commonsensically, a more highly levered economy is more growth sensitive to using short-term interest rates and a flat yield curve, which historically has coincided with the onset of a recession,” he saidYahoo

If inflation were an issue, central bankers worldwide would raise rates; instead, many are lowering rates.

Definition of inflation Changing based on BOJ statements

BOJ stated that they had no intention of raising rates shortly.  The Bank of Japan’s policy meeting ended Thursday with no change to its injections of trillions of yen (hundreds of billions of dollars) into the economy each year through government bond purchases. The BOJ said that it forecasts inflation at 1.1 per cent in 2017, below its 2 per cent target and its earlier outlook for a 1.4 per cent rise in the consumer price index. But while central banks in Europe and the U.S. begin winding back stimulus measures taken to counter the fallout from the global financial crisis, Kuroda has said the BOJ will persist until it can achieve its inflation target — now not expected until 2019. Full story

 South Africa’s Central banker surprise markets with a rate cut

The South African Reserve Bank surprised markets with an interest rate cut on Thursday. While most economists have been expecting the bank to move towards a cut‚ it was not expected to come quite so soon. The Bank cut the repo rate to 6.75% from 7%. Full story

Inflation appears to be decreasing on a worldwide basis

Even though Canada raised rates, the data indicated a rate increase was not warranted. The July rate increase might be a short-lived stint. They might mimic the Fed’s footsteps and then back away.

May saw an unadjusted CPI increase, but it was well below the Bank of Canada (BoC) target. CPI rose 1.3% year-over-year in May, slipping even further than last month’s 1.6%. Statistics Canada claimed the decline was primarily due to decreased food and energy costs. The BoC targets a rate of 2% for a well-balanced money supply. Full Story

According to FT, Inflation in Germany (Europe’s largest economy) fell to 1.4%, a low for 2017

A surprising tumble in Germany’s closely-watched inflation rate. Annual consumer price growth in the eurozone’s largest economy has fallen to 1.4 per cent from 2 per cent in May – the year’s lowest level.

Brazil’s inflation falls to a decade low

Consumer prices in June decreased by 0.23% over the previous month, contrasting with May’s 0.31% increase. The drop came on the back of falls in several categories across the index, including lower prices for housing, transport, and food and beverages. Inflation continued to drop in June, falling to an over-decade low of 3.0% (May: 3.6%). The result was below the Central Bank’s target range of 4.5% plus/minus 2.0 percentage points and is good news for the battered economy. The sharp fall will allow the Central Bank to continue with its easing cycle to support recovery and should help support household spending. Full Story

Credit Suisse goes on to state that Global inflation risks remain low in the following article.

Global inflation trends remain quite benign. In most of the major advanced economies, headline inflation peaked in the first quarter once the positive base effects of energy price developments faded. In the major emerging markets, inflation is also mostly in decline, with the recovery of their currencies and still weak domestic demand being the most critical drivers in countries such as Russia and Brazil. Looking ahead, we see a good reason for this benign global environment of relatively low inflation to last for longer

Why are these central bankers not running out and raising rates?

These countries cannot play with fire; their currency is not the World’s reserve, so they have limited room to manoeuvre. They will not risk a recession when they know this economic recovery is an illusion. Remove the cash infusions, and the economies of the world will collapse.

Look at the US retail sector; the entire industry is imploding due to players like Amazon pushing prices lower and lower. Bloomberg estimates that 8640 stores are set to close by year-end. We think this estimate might be conservative, and the final tally could be north of 9,000.

Extrapolating out to the full year, there could be 8,640 store closings in 2017, Buss said. That would be higher than the 2008 peak of about 6,200. Retail defaults are contributing to the trend. Payless is closing 400 stores as part of a bankruptcy plan announced Tuesday. The mammoth chain had roughly 4,000 locations and 22,000 employees — more than it needed to handle sluggish demand.

With Amazon’s purchase of Whole Foods and Lidl’s entry into the US market, a massive grocery war is underway; this price war will trigger another set of deflationary forces.  Lidl has stated that they would price groceries up to 50% below US rivals.

“This is the right time for us to enter the United States,” Brendan Proctor, chief executive officer for Lidl U.S., told Reuters at a media event in New York late on Tuesday. “We are confident in our model. We adapt quickly, so it’s not about whether a market works for us but really about what we will do to make it work.”

Aldi, the other German company that has been here for some time, already offers prices below Wal-Mart’s costs; the upside here is that the consumer gets goods priced lower than those at Wal-Mart, but the quality is far superior. Analysts estimate that by 2020 Lidl will have over 300 stores in the US. Aldi already has 1600 stores in over 35 states and plans to open another 900 stores within five years.  Aldi and Lidl are a formidable duo; they have already sent shockwaves through Britain’s Grocery Retail Market, hurting old-timers such as Tesco Plc and the ASDA Supermarket chain.

Artificial Intelligence (AI) and Technological breakthroughs will continue to lower prices.  Look at how much pricing power the consumer has today compared to a decade ago; this trend will continue to gain traction.

There is another factor, “ the velocity of M2 money stock,” it indicates that inflation is not an issue.  The velocity of M2 money stock in the US has been plunging for years and shows no signs of letting up; if inflation were an issue, the velocity of M2 would be trending upwards and not downwards. We will examine this in more detail in a follow-up article.

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