He was worried, he said, about too little inflation. That is, instead of going up 2% per year - by the official tally - prices are only going up 1.7% per year. This missing 0.3% got in his crawl. It bugs him so much he wants to do something about it. Of course, it could be erased simply by calculating the CPI slightly differently. Or it could be simply ignored...since it is largely a statistical mirage, with no meaning in the real world. It is a little like early religious scholars who argued over whether the host represented Christ...or really was the flesh of the Redeemer himself. Often unable to resolves these issues by logic or argument, they went to war.
And so it was that James Bullard declared war on the 0.3% inflation that he says is missing...and that he considers essential to a properly functioning economy. Does that mean that an economy with a CPI of only 1.7% will necessarily underperform, leaving widows and orphans hungry and homeless? Will investors be unwilling to back major capital improvements, if they see the CPI falling 0.3% short of the Fed's goal? Will employers hesitate before putting up a 'help wanted' ad...sensing a serious lack of inflation as a threat to their businesses and their livelihoods?
Of course, investors didn't worry too much about the actual words or their meaning. They interpreted this passage as though he had said: "Laissez les bons temps rouler!"
But the bons temps were short lived. Boston Fed chief Eric Rosengren told listeners that he would be 'pretty comfortable' allowing QE to expire later this month as scheduled, after all. The big rally sputtered yesterday; the Dow ended up only 19 points.
Meanwhile, in Europe, central banker Mario Draghi was wrestling with the same devil: low inflation:
"...if this period of low price inflation were to last for a prolonged time, the risk to price stability would increase."
What does that mean? Let's say inflation was running 1000% year after year. Would that be "price stability?" Of course not. Price stability increases as the inflation rate approaches zero, not the other way around. Mr. Draghi might have misspoken. More likely, and more disturbing, he believes what he says. He and Bullard, the high priests of the central bank cult, feel they have the right and responsibility to set prices wherever they want them.
All of which reminds us of an old Diary dictum:
The people who always insist that we follow their ideas are always the same people whose ideas are idiotic.
We wonder what he would have thought of inflation expectations a century ago. Then, there was no consumer price inflation...nor any expectation of it. And yet, the US economy had been growing at a rapid pace...absorbing millions of immigrants from Europe with full employment and rising incomes for just about everyone, rich and poor alike.
On the evidence, the lack of inflation expectations was a big plus. The first central bankers, a century ago, were not alarmed by it...they considered it part of their job description. Their duty was to maintain the solidity of the US dollar. They did this in a very simple and effective manner - by making sure it was gold in an express and unchangeable way.
Gold was subject to inflation too - big strikes in South Africa and California added to the supply and boosted consumer prices in mid-1800s. Then, the market went to work...improving productivity and output, thereby increasing the supply of goods and services that money could buy. Result: prices actually fell in the latter part of the 19th century. Such was the golden anchor to which the dollar was tethered that by 1914 the ship was back where in the harbor it left 100 years before -- with the purchasing power of the greenback almost exactly what it had been in 1814.
Misters Draghi and Bullard can stop worrying.
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.