Jump in Consumer Spending is Transitory, Price Deflation Coming Up

The Fed meets today and Fed Chair Janet Yellen will make another superficial statement of some sort. Most likely, she will reiterate some mush about transitory low inflation while noting a surge in consumer spending. It's the jump in consumer spending that's likely to be transitory.

Target practice Image from MarketWatch

Federal Reserve officials begin their two-day policy meeting Tuesday amid fresh signs that inflation remains lower than they would like, despite strong economic growth.They have penciled in a rate rise before year’s end, but some officials have said they want to see evidence that inflation is rising toward their 2% target before approving such a move.Other officials say they should continue raising rates very gradually because they expect inflation to pick up eventually and they don’t want to let the economy overheat. Other recent data show household spending, supported by a strong labor market and upbeat consumer sentiment, is fueling solid growth.Consumer spending rose a seasonally adjusted 1% in September from August, the largest monthly gain in eight years, the Commerce Department said Monday. Again, the recent hurricanes played a role, driving a 3.2% increase in durable goods—long-lasting products like cars and refrigerators—as many households replaced hurricane-damaged property.

Fed is Clueless

Some Fed officials want to see inflation headed towards 2% before raising interest rates again, others are worried about overheating.

The Fed is clueless, but it does not matter. They have penciled in a rate hike in December, so hike in December they will. The Fed can always find an excuse to do what it wants, as long as the market is willing to go along.

I do not suggest that interest rates belong at 1.0% or any other specific spot. I do not know where they should be, and neither does anyone on the Fed. There should not be a Fed at all.

The economy cannot be steered like a truck. I offered strong supporting evidence yesterday in The Fed's Miserable Inflation Targeting Performance in Pictures.

Since the start of this series in 1960, the Fed hit the range 1.75% to 2.25% only 18.47% of the time, 128 months out of 693 months.

For 331 consecutive months, from July of 1966 through December of 1993, core PCE was above 2.25%.

The last time the core PCE topped 2.0% was January through April of 2012. In only 4 months out of the last 108 months, from September of 2008 to present, did core PCE exceed 2.0%.

Yet, inflation is obvious for those who know where to look. Decades of Fed mismanagement culminated in three consecutive bubbles. The Fed does not see bubble number three because it hasn't popped yet. When it does pop, we will have another round of asset deflation, likely coupled with outright price deflation.

Mike "Mish" Shedlock

No. 1-4

The economy can be "steered like a truck", if your goal is to run over fixed income investors on bicycles. Apologies to the NY victims.


Is the Fed targeting inflation or just trying to make the real dollar cost of government debt service zero ?


Who cares what PCE is doing? PCE has absolutely nothing to do with the cost of living for most registered voters. Neither does CPI. The Fed is targeting an irrelevant measure, which is one reason why Yellen has to go. Good riddance to the clueless bimbo.


Mish- I'm confused a bit. You said, "When it does pop, we will have another round of asset deflation, likely coupled with outright price deflation." But in a recent article you predicted low equity returns for the next 10 to 20 years rather than a full on bust. So how do you reconcile these two statements?