It’s a mystery. The Federal Reserve has engaged in unprecedented monetary stimulus in the past five years, yet the Consumer Price Index (CPI) shows flat inflation or even falling prices in some cases. New York Times columnist Paul Krugman even says that this lack of inflation discredits Austrian economists who said we would eventually have mass inflation as a result of Fed policies. According to Krugman, those who said the dollar would collapse in value have been proven wrong as alarmists who cried wolf.
Maybe it’s because the CPI doesn’t include many of the types of goods people are actually buying. As an example, lettuce has risen 24% and apples 11%. Many other groceries such as meat are also rising significantly as inputs such as grain for feeding meat animals are skyrocketing in price. This is because the CPI figure used by economists measures “core inflation” which does not include fuel and grocery prices. Peter Schiff says this figure is pure propaganda so the government can lie about how much inflation it is actually creating.
But this still does not explain the lack of overall rampant inflation that many economists were predicting as a result of the Fed’s massive printing spree. How is it possible that tripling the monetary base has not caused prices to triple as well?
One reason is because much of the new money being created is being held by the banks as excess reserves, money that the banks keep deposited at the Fed. The Fed is actually paying banks interest to keep their money there.
And the money that is making its way out into the economy is not going into consumer goods but rather is going into the capital goods sector and assets. For example, commodities such as lumber used in building homes are near record highs. Many commodity inputs that corporations use to produce goods are also near record highs. The stock market is reaching record highs as are many areas of the real estate market. And just take a look at crude oil at nearly $100 per barrel and near record high gasoline prices, for example.
In the following interview by Tom Woods, Mark Thornton provides some insight into how the inflationary process works and what’s ahead for consumer prices. Thornton also explains why the Federal Reserve would not consent to an audit for Germany’s gold held at the New York Fed.