Federal Reserve Chair Janet Yellen recently referred to the 0.4 percent increase in the Consumer Price Index (CPI) for May as noise. While she may consider it merely background chatter, we must ask ourselves: what kind of noise are we dealing with?
Is it inconsequential, like a street performer’s ramblings? Or is it an urgent signal, reminiscent of a fire alarm warning us of impending danger? The distinction is essential.
Although Yellen did not elaborate on her comments, it seems she views the CPI fluctuations as unworthy of concern—implying that inflation is not a pressing issue. However, at Economic Prism, we disagree.
Regardless of CPI readings, the cost of essential living items is rising. According to MarketWatch, prices for healthcare, gas, housing, pork, beef, chicken, orange juice, milk, and coffee are all on the rise. A bargain laptop priced at $500 loses significance when pork prices have soared by over 50% in the past year and beef costs have risen by 74% since 2009.
It is clear that essential expenses are climbing far more rapidly than wages. These rising costs slice through family budgets like a knife. Yet, Yellen seems inclined to overlook this reality. Her primary concern is deflation—an issue she’s eager to avoid at all costs. Here’s why:
Fearing the Deflationary Spiral
In simple terms, deflation occurs when prices drop or when the value of money increases. This may sound advantageous—who wouldn’t enjoy buying more for less? Nevertheless, it sends shivers down the spines of central bankers and government officials.
Their reasoning is straightforward: when prices decrease, consumers tend to postpone purchases, waiting for even better deals. Why buy a new car today if it’s likely to be cheaper next month—or even cheaper the month after?
As consumers restrict their purchases to only the essentials, companies struggle, leading to layoffs and reduced production. Economists refer to this phenomenon as a deflationary spiral—where falling prices result in decreased production, leading to lower wages and diminished demand, which perpetuates further price declines.
The peril of deflation lies significantly in the realm of debt. A job loss can make it nearly impossible to manage mortgage or car payments. Even a minor drop in income can complicate debt servicing further.
Conversely, this is why central bankers favor mild inflation. It drives consumer demand and gradually alleviates the burden of debt. Over the span of a 30-year mortgage, a mere 2 percent inflation rate can effectively halve the burden of a house payment, also easing governmental debt obligations.
Janet Yellen’s Unwise and Inhumane Policies
Regrettably, the Federal Reserve’s strategies to stave off deflation carry significant consequences. They disrupt the entire economic price structure. This manipulation causes increases in the prices of homes, stocks, junk bonds, and treasury debt, while simultaneously depreciating the currency and the price of credit.
This creates a ripple effect, as individuals and businesses adapt their borrowing, spending, saving, and investing behaviors. Congress, noticing historically low interest rates, seizes the opportunity to escalate national debt to $17 trillion. Enthusiastic investors may even spend $84 million on a painting of a simple black and white canvas titled Black Fire I.
However, the ramifications of artificially low credit not only inflate stock and treasury values into the stratosphere—they extend even further.
We now inhabit a world where central bankers create money from thin air to purchase both government obligations and stocks. It’s astonishing. Financial, and by extension all, markets are subject to unprecedented manipulation.
“To me, a wise and humane policy is occasionally to let inflation rise, even when it is above target,” Yellen stated two decades ago.
We wish this perspective were easier to accept. However, if you value liberty, freedom, and limited government, then recognizing that everything is manipulated by a select group of appointed officials is not only unwise and inhumane—it’s downright intolerable.
Sincerely,
MN Gordon
for Economic Prism
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