Inflation Has Left the Building

The March 2014 Elliott Wave Theorist said:

The next big monetary event will not be more inflation but deflation.

Indeed, since that prediction was published, inflation has remained subdued, despite healthy GDP numbers.

As you may know, the Fed set a 2% inflation target in January 2012. Yet, the personal consumption expenditures price index has averaged just 1.4%. Exclude volatile food and energy prices and it inches up to 1.6%, according to Bloomberg (March 12).

"Forget inflation. We should be concerned about deflation," is the title of a May 1 Washington Post article. Here's an excerpt:

There are times when it seems we're worrying about things that aren't worth worrying about. A good example these days is inflation. Amazingly, the complaint is that it's not rising fast enough....

Critics complain that the Fed isn't hitting its own inflation target, which is 2 percent on the PCE. This suggests incompetence. If the Fed can't hit its target, the assumption goes, what else can't it do? Frankly, this is fearmongering; the Fed simply isn't powerful enough to hit a precise target. As long as reported inflation stays between zero and 2 percent, the Fed is delivering a crude price stability.

A more realistic concern involves the Fed's ability to respond to a recession. Typically, the Fed cuts interest rates to reverse an economic downturn. But interest rates, reflecting inflation, are already low. The fear is that the Fed won't be able to cut rates enough to prevent a recession from getting worse.

Consider. The fed funds rate -- the rate on overnight loans and the rate most influenced by the Fed -- is now set at about 2.5percent. By contrast, it was 5.25 percent in 2007, the start of the last recession, and higher earlier. If the Fed can only cut rates modestly before they hit zero, then the next recession could be lengthy and stubborn. That's the argument.

This brings us to the most serious of inflation's alleged shortcomings. Paradoxically, it's "deflation"...

You can read the entire article by following the link below: