Perhaps it is revenge for 2015’s residual seasonality breakout. Or maybe it is just being celebrated as delicious irony. Did the BEA just take revenge on the Fed?
In early 2015, first the Philadelphia branch of the Federal Reserve and then its San Francisco arm both published essays essentially accusing the BEA of being unaware of statistical defects in their major accounts – GDP. They stirred up a hornet’s nest of media speculation by doing so, particularly as many in the mainstream were desperate to try and make sense of how an economy supposedly taking off, as FOMC had been telling it, was at that moment looking decidedly unhealthy.
In the end, the BEA found no residual seasonality in its data but adjusted their numbers anyway. Guilty conscience or backchannel pressure has never been established, though it really didn’t matter one way or the other. The economy fell into a downturn all the same and it has yet to retrace much from its trough (another “L”).
I doubt there was any intent behind revising last month’s PCE Deflator, but I can’t help but wonder if there weren’t a few chuckles at the FOMC’s expense. Recall that initially the BEA calculated its version of consumer price inflation at just barely above 2% for March 2018. It was only the third time in six years this measure, which the Fed considers the most accurate and therefore its benchmark, had registered greater than the explicit policy target.
With the usual monthly revisions, the BEA this month has now taken away that third success. Revising several months slightly lower, the PCE Deflator in March is currently thought to be 1.97% instead of 2.01%. As if to pour a little salt on the wound, the BEA also figures inflation in April 2018, the latest number, to have been an equal 1.97%, as well. Close but not close enough; the Fed’s track record now goes back to just two months out of a full 72.
Obviously, there is no animosity or grudges between these agencies, and all that is mere entertainment. What really matters is not the splitting of hairs around the subjectively drawn 2% level, rather it’s the lack of indicated acceleration in any part of the PCE data.
Inflation hysteria was itself an amplified outgrowth of a slightly realistic scenario. If globally synchronized growth was meaningful, it would be somewhat reasonable (just how reasonable was always the question) to believe that an actual recovery in the rest of the world would contribute significantly to US circumstances (even assuming closed systems, as Economists do).
Economic acceleration therefore would lead to price acceleration, which then would have meant a more aggressive FOMC in a farther, faster rate hike trajectory. The only result, and the projection the media kept emphasizing time and time again, was to be an epic BOND ROUT!!!!
So, it’s not 1.97% vs. 2.01% that matters; it’s that there isn’t any reason to suspect the economy is facing more acute inflationary pressures on whatever account for whatever reasons (wages or something else). Instead, there is, as always, a clear lack of acceleration enduring in all the pieces and components. The deflator can’t even manage 2% with a huge assist from WTI.
While it may seem contrary to the mainstream assessment, the fact that the FOMC actually published references to both the core deflator as well as the Dallas Fed’s trimmed mean figure in its last meeting minutes demonstrated that not everyone on the Committee was onboard with the narrative.
At this point, individual policymakers have reputations to once more consider in the growing prospects of yet another failed attempt at “transitory.” The last big one was Verizon’s entry into unlimited wireless data, which had the deflationary effect of pulling down each of these deflators. That one act was itself transitory, but the tendency of consumer prices to, in the aggregate, remain anchored on the downside is not.
Inflation hysteria has faded away simply because it was more imagination than rational analysis. There was very little behind it except that it was repeated so often by what are nominally respectable outlets people thought there must be something to it all. Like residual seasonality, however, it has proven to be little more than the downright Ptolemaic practice of starting with an utterly unmovable premise (recovery) and working backward to interpret “evidence” for it.