OPINION: The Federal Reserve is mistakenly concentrating on lagging indicators that will flash too late for it to avert a catastrophic recession or a financial crisis, columnist Rex Nutting writes as he examines a few leading indicators of inflation.
The Federal Reserve is speeding down the road looking in the rearview mirror, chasing a demon it doesn’t understand and praying that inflation will recede before it drives the economy into the ditch.
The second problem is that the Fed is looking at the wrong things anyway. The Fed’s model of inflation is inadequate at best, and fatally wrong at worst.The Fed’s current policy maintains that the unemployment rate is too low, which means that the supply of labor is so restricted that workers can demand higher wages and compel businesses to raise their prices in order to pay their wage bill.
Leading indicators To see where inflation is going, it’s better to look at leading indicators of inflation, including commodity prices, house prices, supply times, the value of the dollar BUXX, -0.01% DXY, +0.03%, growth of the money supply, and financial conditions. Almost all of these have peaked and are now declining. That’s a sign that inflationary pressures are lessening.
The real money supply soared at a 66% annual rate in the second quarter of 2020 when the Fed and the Congress turned on the spigot of stimulus; it’s now falling at a 4% annual rate, the first sustained drop in the money supply since 2010. Given the Fed’s obsession with wages and inflation expectations as the twin drivers of inflation, you’d think policy makers would be paying more attention to the recent deceleration in wages and to the reduction in medium-term inflation expectations.
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