The United States needs more inflation, interest rates are too high and the Federal Reserve should be doing a lot more than it is currently doing. These are the actual words of one Federal Reserve official.
What may seem like a snide remark made in jest actually turned out to be a genuine comment purported by Minneapolis Federal Reserve President Narayana Kocherlakota at a town hall meeting in Montana on Thursday. When asked why the U.S. central bank is reducing its quantitative easing measures, Kocherlakota said he had no “good answer.”
Citing low inflation levels and high unemployment numbers, Kocherlakota thinks interest rates are too low, even though they have been at artificially record lows since the financial collapse in Dec. 2008. Whether or not he wants the Fed to slash its rates to the near-zero and negative rate levels that the European Central Bank (ECB) surprisingly imposed this week is unknown.
The central bank official averred that since the Fed hasn’t been able to reach its objective of higher employment and a two percent inflation level then it’s a signal that it needs to reduce interest rates.
“Given where we are with inflation, I think that it’s challenging to know why we are removing stimulus from the economy at the rate that we are,” he told the audience. “I think that is a challenging question, and I don’t really have a good answer.”
Overall, according to Kocherlakota, inflation will remain under two percent until at least 2018, which means the central bank is not taking advantage of its full resources. “Right now, this nation needs more inflation.”
Other Fed board members have started to realize that inflation could accelerate in the near future if the central bank doesn’t begin to raise rates soon, though Kocherlakota disagrees with this assessment.
Inflation is already here
Inflation is a general increase in the money supply and the rise in prices is the consequence of this money pumping. Price inflation has been running rampant throughout the U.S. and the rest of the world, which can be seen by any consumer who performs his or her own grocery shopping.
For instance, the Economic Policy Journal listed seven items becoming costlier: sandwiches, bacon, chocolate, Starbucks, airfare, chicken and electricity.
Bloomberg News, meanwhile, published an interesting piece Wednesday entitled “From Chocolate to Beer, Shrinkflation Hits the Supermarket,” in which it discusses how companies are charging consumers the same or more for less. Pippa Malmgren, economist and advisor to former President George W. Bush, is concerned that there are growing price pressures as she outlined the threats in a new book “Signals: The Breakdown of the Social Contract and the Rise of Geopolitics.”
“Shrinking the size of goods is exactly what happened in the 1970s just before inflation proper set in,” wrote Malmgreen. “There are signals that prices are starting to rise, or that inflation pressures are building.”
In other words, shrinkflation is the prologue to true inflation.
The business news outlet wrote about this interesting move by Mondelez International Inc.’s Cadbury unit’s Dairy Milk Bar:
“In 2011, the company lopped two squares of chocolate from the snack, holding the price unchanged. At the time, the company cited rising costs. Last year, it made the corners of the bar more rounded, reducing the weight.”
It’s unclear if the Fed officials are blind or if they never head to the grocery store themselves.
Leave a Comment