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October 31, 2017 | Jump in Consumer Spending is Transitory, Price Deflation Coming Up

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
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

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

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October 31st, 2017

Posted In: Mish Talk

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