Bad Reasons for Inflation (post 22)

William Dudley gives four terrible reasons for why he thinks inflation is going to pick up this year in the United States.  His reasons:

1) Oil is no longer plummeting
2) Rents are rising
3) Jobs and incomes are growing
4) Household expectations of inflation have been stable (despite disinflation)

Why are these reasons terrible?

1) Oil is no longer plummeting, but oil isn't a part of core inflation - and core inflation has been falling since 1992.

http://www.tradingeconomics.com/embed/?s=usacorecpirate&d1=19920101&d2=20151231&h=300&w=600&ref=/united-states/core-inflation-rate

2) Rents are rising.  But that is only because there are fewer and fewer rental vacancies.  If vacancy rates were stable and rents were still going up, then that might point to higher inflation.  But if vacancies are going down and rents are going up, that is simply explained through supply and demand.  Interestingly, there has been a lot of hype this year about apartment vacancy rates remaining flat.  But apartment vacancies are and always have been a very small part of rental vacancies.  They don't drive rental prices.



3) Jobs are growing - that's great news.  However, incomes are barely growing.


And incomes fell a long way before they started to grow.  Prices didn't fall along with median real wages, so, arguably, there may be slack between wages and prices that needs to be taken up before wage increases can cause inflation.

4) Household expectation of inflation has been (sort of) stable - this fact actually supports the opposite of Dudley's conclusion.  Inflation expectations can create inflation.  Deflation expectations can create deflation.  The fact that Americans have been expecting greater inflation than we have actually been seeing has acted as prop for inflation.  Had Americans not been expecting as much inflation, our inflation rates would be even lower. So our expectations of inflation have been slowing disinflation, but they haven't been enough to prevent disinflation.  And American's expectations of inflation have been falling!!! This is not good news if you are hoping for more inflation (like we all should be).

Is William Dudley an idiot?  Probably not.  More likely he has an agenda.  He wants higher interest rates.  Why?  Because high interest rates help the very wealthy to create more wealth.