The Fed’s Got Problems But Deflation Isn’t One of Them

The following letter was sent to the editors of the Wall Street Journal in response to a March 13^th opinion piece by Stephen Moore and Louis Woodhill entitled “The Fed is a Threat to Growth.”

To the editor, 

While we at Cato hardly qualify as apologists for the Fed, I can’t resist defending it from Stephen Moore’s sensational claim (“The Fed is a Threat to Growth,” March 14) that its “deflationary” policies have “chopped 1 to 1.5 percentage points off real growth over the past six months.” 

“Deflation,” first of all, means an absolute decline in prices, and not merely a decline in the rate at which prices increase. And notwithstanding Mr. Moore’s assertion that “the consumer-price index has been remarkably flat or slightly negative,” neither the CPI nor any other popular price index has actually declined in during the last six months. 

What’s more, again contrary to Mr. Moore’s claims, “core” inflation rate measures, which exclude energy and food prices and are, for that reason, less volatile and more reliable inflation measures, have been both remarkably stable and very close to the Fed’s two percent target over the last six months—and longer. The core CPI rate has actually remained slightly above two percent, while the core PCE (Personal Consumption Expenditures) rate, the Fed’s preferred measure, has hovered just an insignificant smidgen below it. And while Mr. Moore may believe that the especially volatile commodity prices excluded from these core inflation rates are in fact the best indicators of the Fed’s stance, his opinion is sui generis, notwithstanding his utterly fanciful claim that Paul Volcker favored a commodity-price target. 

Finally, besides inflation measures there is another, still more reliable gauge of the stance of monetary policy: the rate of change in total consumer spending on goods and services, as measured by the economies nominal GDP growth rate. That rate has been rising steadily since 2016, and has, for been somewhat above the robust value of 5% since mid-2018.
 

Sincerely,
George Selgin
Director, Center for Monetary and Financial Alternatives 
The Cato Institute, Washington, D.C.