Fed Admits Inflation Higher Than Expected

Written by Luke Burgess
Posted June 23, 2021

Answering questions by a special House subcommittee yesterday, Federal Reserve Board Chair Jerome Powell admitted that inflation in the U.S. has risen to levels higher than previously expected, before reiterating the Fed's stance that higher inflation is only temporary.

“I will say that these effects [inflation] have been larger than we expected," the Fed chair told lawmakers, “But the incoming data are very consistent with the view that these are factors that will wane over time, and inflation will then move down toward our goals and we'll be monitoring that carefully.”

The annual inflation rate in the U.S. increased to 5% in May. That was up from 4.2% in April, and the highest inflation rate since August of 2008. Among the biggest price jumps we've seen are gasoline (up over 50%) and used vehicles (up almost 30%).

Powell and the Fed keep telling us higher inflation is only “temporary.” Go back through almost every one of the comments about inflation in the past several weeks and you'll see there are only two words the Fed has used to describe rising inflation: “transitory” and “temporary.”

But what does that mean?

Is “temporary” six months?

Is it a year?

Five years?

“Temporary” relative to what?!

Well, the Fed isn't going to answer that question; it's not going to give a precise estimate of how long +2% inflation will persist.

Truth is, the Federal Reserve doesn't work for the public. It's not elected officials, so it doesn't answer to us.

The Federal Reserve works under the direction of Congress, but it really doesn't work for the benefit of government either. Nor does the Fed work for the benefit of its shareholders or to boost domestic investment markets.

The Federal Reserve has but one god: stability.

It doesn't work to really benefit anyone. The Fed's main focus is to keep things stable.

And that's not speculation or interpretation. The Federal Reserve Bank of Chicago's Mission Statement reads:

The fundamental mission of the Federal Reserve System is to foster the stability, integrity, and efficiency of the nation's monetary, financial, and payment systems in order to promote optimal macroeconomic performance.

Imagine the economy as a massive and insanely complex mechanical clock — one that's as large as a city with millions of interconnecting gears of all sizes. The Fed's job isn't to make this incredible clock tick as fast as possible. The Fed's job is to keep it ticking at a steady pace in effort to keep accurate time.

The point is, if it's keeping the clock ticking at a steady pace by using vague rhetoric like “temporary” and “transitory” — instead of giving a more precise estimate on how long +2% inflation will persist — then vague rhetoric it will use. But rhetoric isn't truth.

The Federal Reserve also keeps telling the public that if inflation does get out of control, it has tools to render it low. Powell also repeated that to lawmakers yesterday and denied claims that 1970s-style inflation would happen again.

“You have a central bank that’s committed to price stability and has defined what price stability is and is strongly prepared to use its tools to keep us around 2% inflation,” Powell said. “All of these things suggest to me that an episode like what we saw in the 1970s... I don’t expect anything like that to happen.”

You can trust the word of the Federal Reserve. Or you can see what's happening in front of your eyes. Inflation is very fast becoming a major topic of concern for everyone and the market will react accordingly.

Until next time,
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Luke Burgess

Luke’s analysis and market research reach hundreds of thousands of investors every day. Through his work with the Outsider Club and Junior Mining Trader, Luke helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.

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