In a recent briefing Janet Yellen seems to have declared that she was surprised that inflation has been so low. Official statistics put inflation at 1.3% on an annual basis, far below the magical 2% that is supposed to be the be all and end all of Fed aspirations for northward heading prices.
It is clear that statisticians can manipulate inflation figures depending on what they put in the inflation basket. In order to keep wages low the basket can contain basic staples that do not vary much in price and various factors can be assigned different weightings so as not to influence the final figure more than a minimal amount. Inflation rates are kept low for political reasons.
This Newsletter is of the opinion that there has been a lot of inflation in the US if one looks for it in the right places. Asset prices on the stock market have increased by more than 300% since 2008 according to the Dow Jones index. The S&P index has gone up 12% since the beginning of 2017, NASDAQ more than 12% in the same time period, and the DJIA more than 20% since November 2016. New car prices in the US have increased significantly while prices for used cars have gone down about 10% in the last two years. The average selling price of a new car in 2008 was 28,350 and 34,450 in 2016.
The really important figure, however, is the median price for a house. In 2000 the median price was 167,337 for a new home while it is now 314,094. That is an 88% increase. In the meantime real wages have not increased that much. The median income in 2000 was 29,366, and it is 30,484 now (US debt clock).
One can easily see that there has been a lot of inflation in certain sectors and that wages have not at all kept pace with increases in asset prices, car prices and the cost of a new home. The conclusion is that workers have become much poorer while the haves have become much richer.
In view of this the perplexity of the Fed officials regarding inflation must be taken with a grain of salt. They know that asset prices have become much more expensive thanks to QE and low interest rates. Financialization has brought the share of GDP for financial services to about 9%, up from the usual 2% of yesteryear.
For the future one can expect very high inflation rates as soon as the effects of the combined Chinese-Russian offensive against the dollar begin to be felt. The days of the almost total dominance of the US dollar in global finance are numbered, and Ms Yellen will not be surprised at how much the CPI rises very soon.