► Try the Financial Times for 4 weeks for just £1. Start your trial now –
So steven more that’s donald trump’s new nominee for the federal reserve board of governors has suggested in an op-ed that the fed should target commodity prices when it’s looking at inflation here’s what the fed targets right now this is price changes in core personal consumption expenditures personal consumption expenditures this is just a basket of all the
Things that you buy cell phone service cars they’re weighted depending on how much money you spend and then you throw out some stuff that’s really volatile energy prices and food prices right those bounce all around you want an accurate measure so you’re just looking at core prices that people spend every month that’s what the fed is tracking here’s what steven
Warren what’s the track you want to track the price of commodities this is mostly gas and oil energy products but also metals steel aluminum the measure we’re using here there are lots of different ways to measure it but this is the producer price index this is what companies pay for commodities ok why would you want to do that there are a ton of different ways
To measure inflation i’m not going to go into detail on all these there are consumer surveys like the michigan survey that asks consumers what they think inflation is going to be their market measures like the five-year five-year forward it looks at complex measure of treasury prices to see what people think inflation is going to be in the future there’s this
Measure trend mean pce from the dallas fed and then there’s a median cpi from the cleveland fed they’re fascinating we’ll talk about them some other time but they’re different ways to look at inflation and the question is always if you’re arguing for a certain kind of inflation are you genuinely interested in the best way to measure price change or are you or are
You inflation shopping basically if you can argue that inflation is really low you can get the fed to be more aggressive and accommodative and help the economy grow more if you can argue that inflation is high then you can get the fed to back off and at various times over the last 10 years you’ve heard different people argue for different measures so steven moore
New nominee to the government governors board is he arguing or is he inflation shopping ok so let’s look at what commodity prices do in the early 80s there was some discussion about actually tracking commodity prices for the fed the problem is they were already pretty volatile back then they move around a lot they’re fantastically volatile now what’s going on
Political risk saudi arabia makes decisions russia makes decisions venezuela makes decisions the united states makes decisions about iran there are a lot of things going on in the price of oil that have nothing to do with markets or inflation and everything to do with politics the fed can’t control those things so it’s hard to react to those things okay the other
Problem with tracking commodities is that it seems like it’s a diversified basket you’ve got metals you’ve got agricultural products you’ve got energy but mostly it’s energy it’s over-represented first of all it’s just a big part of what we spend our commodity money on the other thing is other commodity prices actually reflect the price of energy when you’re
Looking at aluminum for example it takes a ton of energy to make aluminum right so the price of energy is going to necessarily affect the price of aluminum it’s over-represented in the entire basket so if you want to track commodities what you’re really tracking is gas the other thing that’s happening right now is particularly energy is subject to what we’d
Call a secular shift this is a change in technology that has nothing to do with the underlying market so right now fracking technology has changed the way we extract natural gas and oil that means when you get periods like this 2014 2015 saudi arabia american frackers are competing to drive the price of oil down that’s not really part of the overall inflation
Picture that’s volatility in technology that has absolutely nothing to do with the rest of the picture of inflation so francisco blanch he’s a commodities analyst for bank of america merrill lynch told me that another problem with this measure is that not only is energy becoming more volatile it’s a smaller and smaller part of the basket of what we buy people
Are becoming more energy efficient that’s only going to increase in the future so you have a measure that is subject to political risk it’s mostly gasoline it’s got these secular shifts going on with technology it is a smaller and more volatile part of the things that we buy and this is what steven moore wants to measure now the fed does look at commodity and
In particular energy prices when it’s think about inflation more broadly it’s one small part of what they’re considering they’ve said that in their public statements but this gives us a clue to what steven moore might be thinking i don’t have a channel into his brain energy prices in particular are dragging down this broader commodities basket to what you could
Technically call deflation prices are actually decreasing what normally happens when central banks see deflation is that they freak out there very accommodated if they’ll do anything they can to help the economy grow so given that energy prices or commodity prices are volatile and growing even more volatile given the fact that it is a small part of the basket
Getting even smaller of what we buy given the fact that it’s subject to political risk given the fact that it’s mostly gasoline given the fact that there are technological shifts we have to decide is steven more interested in the best way to measure inflation or is he inflation shopping
Transcribed from video
How to go inflation shopping | Charts that Count By Financial Times
