Search
All
Economics
Politics

Don’t Miss a Post. Subscribe now.

What Can the Fed Do About the Price of Food, Medicine, Gasoline, or Rent?

•

•

29 comments on What Can the Fed Do About the Price of Food, Medicine, Gasoline, or Rent?

•

CPI Weights from BLS chart by Mish

Chart Notes

  • The above chart shows percentage weights in the CPI according to the latest CPI Report, Table 1, relative weights.
  • I believe the BLS has a subtotal error in the table. Specifically, the Shelter Less Energy Services subtotals do not add up to 57.395 (32.802+6.971+5.597=45.37). I believe the BLS is missing Education, Recreation, and other services. I plucked those from Table 2.
  • Items in blue are inelastic, that is demand for them will not change regardless of what the Fed does.
  • Items in green are elastic items. The Fed can reduce demand for them by hiking rates.

What the Fed Can and Cannot Do

  • The Fed cannot directly influence the price of anything because it cannot produce either goods or services.
  • The Fed can reduce or increase demand where demand is elastic by raising or lowering the cost of money.

Demand Destruction

I have often spoken of demand destruction by Fed rate hikes. Curiously, the primary demand destruction is not even in the tables.

Home prices are not in the CPI. Yet by hiking rates, the Fed will certainly cool the demand for housing.

With decreased demand for housing comes decreased demand for things like furniture, landscaping, carpet, etc. 

By hiking rates, the Fed also reduces the demand to hold stocks. The price of equities drops. That also reduces the demand for housing, new cars, eating out, and travel. 

Elastic vs Inelastic Demand 

  • Elastic items total only 19.59%.
  • Inelastic items total a whopping 80.41%.

This is why inflation Expectations theory the Fed abides by is total nonsense. 

People will not rent two homes if they perceive prices will rise. Nor will people stop paying rent and wait for declines in they believe prices will fall.

The same applies to buying food, gas etc. 

Stupidity Well Anchored: Absurdity of Inflation Expectations in Graphic Form

I discussed the silliness of inflations expectations theory in Stupidity Well Anchored: Absurdity of Inflation Expectations in Graphic Form 

CPI Percentage Weights

The idea behind inflation expectations is that if consumers think prices will go down, they will hold off purchases and the economy will collapse. The corollary is that is consumers think inflation will rise, they will rush out and buy things causing the economy to overheat.

With that backdrop, let’s have a Q&A. I believe the answers are obvious in all cases.

Inflation Expectations Q&A

Q: If consumers think the price of food will drop, will they stop eating out?
Q: If consumers think the price of food will drop, will they stop eating at home?
Q: If consumers think the price of natural gas will drop, will they stop heating their homes and stop cooking to wait for the event.
Q: If consumers think the price of gas will drop, will they stop driving or not fill up their car if it is running on empty?
Q: If consumers think the price of gas will rise, can they do anything about it other than fill up their tank more frequently?
Q: If consumers think the price of rent will drop, will they hold off renting until that happens?
Q: If consumers think the price of rent will rise, will they rent two apartments to take advantage?

Asset Irony

People will rush to buy stocks in a bubble if they think prices will rise. They will hold off buying stocks if they expect prices will go down.

People will buy houses to rent or fix up if they think home prices will rise. They will hold off housing speculation if they expect prices will drop.

The very things where expectations do matter are the very things the Fed ignores.

Demand destruction will occur in the small subset of elastic items plus housing and stocks.

Except as related to recreation and eating out, rate hikes will not impact food, energy, or shelter, the overwhelming majority of the CPI.

Finally, please note A Fed Economist Concludes the Widely Believed Inflations Expectations Theory is Nonsense

This post originated at MishTalk.Com.

Thanks for Tuning In!

Please Subscribe to MishTalk Email Alerts.

Subscribers get an email alert of each post as they happen. Read the ones you like and you can unsubscribe at any time.

If you have subscribed and do not get email alerts, please check your spam folder.

Mish

Subscribe to MishTalk Email Alerts.

Subscribers get an email alert of each post as they happen. Read the ones you like and you can unsubscribe at any time.

This post originated on MishTalk.Com

Thanks for Tuning In!

Mish

Mike Shedlock

Recommended Articles

Comments to this post are now closed.

29 Comments
Newest
Oldest Most Voted
ZZR600
ZZR600
4 years ago
If you want a peek at the future, look at Lebanon now. What happened in Lebanon is not unique, but as a much smaller economy they hit the wall much faster.
0
0
StukiMoi
StukiMoi
4 years ago
“What Can the Fed Do About the Price of Food, Medicine, Gasoline, or Rent?”
WRT nominal Dollar prices, they can print less money. Reduce the money supply. Are there really people out there, who think rent won’t drop from $3000/month for a one bedroom box in San Francisco, if the dollar is $20 per Gold ounce? If so, where the heck would these renters come up with all that Gold from, every month?…. Prices in dollars, are ALWAYS affected by the number of dollars in circulation. Stop printing dollars, and prices in dollars drop. Always.
If the question actually intended to be asked, is not about nominal prices, but rather: Whether The Fed can do something about AFFORDABILITY of so called “inelastic” items, the question is again yes. And again, it’s both very obvious and very simple: People will always be better able to afford anything, including inelastic items, if you don’t steal their wealth, than if you do steal their wealth. The reason people cannot afford stuff, is because they DON”T HAVE ENOUGH WEALTH (oh my Molly, what a revelation…). Wealthy people don’t really struggle to buy food, now do they?
Conveniently for The Fed (as if the between zero and two of them who even have the basic literacy to understand, care…): Both reducing nominal prices, AND increasing affordability, thus have exactly the same solution: Stop stealing people’s wealth by way of debasement. The Fed doing so, is both the reason for nominal price increases, AND for the people who are robbed by the debasement’s inability to afford stuff. So, for anyone who simultaneously cares even one iota about actually fixing them, and who possesses even the most rudimentary comprehension of basic arithmetic and fundamental economics, both problems are really, really easy to fix: Stop the Steal.
0
0
prumbly
prumbly
4 years ago
Not sure exactly how inelastic Mish’s inelastic categories really are. Faced with higher prices poor people will buy cheaper food (less meat and other luxury items, more potatoes), drive fewer miles, travel less, move to a cheaper, smaller apartment, decide they can’t afford to send Little Johnny to college, postpone having that dodgy mole removed, etc.
0
0
shamrock
shamrock
4 years ago
Did you see Mark Cuban’s suggestion that the FED short sell things where the price has gotten too high?  Had to laugh at that one.  Short selling requires that you borrow something and then sell it, on the promise that you will buy it back later, thereby seemingly and artificially increasing the supply.  Not sure how you can borrow bread, or a car, and sell it.  The current owners might notice it’s missing.
0
0
shamrock
shamrock
4 years ago
“If consumers think the price of food will drop, will they stop eating at home?”
No, but they will buy the minimum, “just in time” grocery shopping so the speak.  Conversely, if they expect prices to rise they will buy in bulk now if they are able.  Why not?  Easy  non taxable 8-10% ROI.
0
0
TLinFL
TLinFL
4 years ago
Meanwhile, back in Florida, multi-generational housing is the new thing, and guess what pops up: 

AR Homes released lots at Lakewood Ranch’s Waterside on the southern side of the community that ultimately had to go to a lottery system because of popularity.
0
0
Robbyrob
Robbyrob
4 years ago
China has a fateful choice to makeThe Ukraine war, Covid, and the real estate bust herald a crossroads for the world’s biggest nation. https://noahpinion.substack.com/p/china-has-a-fateful-choice-to-make?s=r&utm_campaign=post&utm_medium=email
0
0
Maximus_Minimus
Maximus_Minimus
4 years ago
Reply to  Robbyrob
China is on the verge of collapse – for ten years now.
Maybe if they cut interest rates to zero, and print money like there is no tomorrow, they can reinflate the stock market, and the housing market.
0
0
amalagoli
amalagoli
4 years ago
Finally some common sense discussion on the Fed’s (lack of) power. I have been making similar arguments on Linkedin and with colleagues. 
Yes, monetary policy is responsible for the current inflation, but not in the way people think (too much money). The Fed allowed companies to use easy money for financial gimmicks like shares buybacks instead of investing in the real economy. This is because the Fed’s goals has been asset prices all along (and they have profited handsomely from that policy, it seems).
But consider for a second if that easy money came with strings attached to, say, build domestic chip plants and improve logistic operations. Some of this inflation would not exists. Furthermore, by powering big financial groups the Fed has allowed large acquisitive landlords to create monopolistic markets in some rental markets, hence exacerbating the rents run up. 
Now the Fed will raise rates, so that people stuck in high rents will be less capable of buying. Imagine what that will do to rents inflation.
We have to thank the financialized economy for this, and its masters who have equated the real economy to the price of paper assets.
0
0
JeffD
JeffD
4 years ago
Why don’t rising rates lower rent? If people have less money to spend, won’t they be forced to pay lower rents? It seems landlords have to cater to renters, not the other way around.
0
0
Greenmountain
Greenmountain
4 years ago
Reply to  JeffD
Also impacted by the law of supply and demand and in some parts of the country, demand far exceeds supply leading to price increase and in other parts we are likely to see less demand – lower prices will eventually kick in.  Although I suspect land lords will hold out as long as they can.
0
0
StukiMoi
StukiMoi
4 years ago
Reply to  Greenmountain
“Although I suspect land lords will hold out as long as they can.”
Which is why following Mellon’s advice,
“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people”,
instead of bailouts; extend-and-pretend; and turning every tiny piece of irrelevant minutiae into a drawn out process for ambulance chasers and kangaroo courts to feast over in silly courtroom dramas for idiots’ entertainment; is so important.
Gold at $20/oz (or $1/gram to make it easy on the rest of the world); no more Fed; no activity taxes; everybody gets their day in BK court, but noone, not even Wallmart, gets more than one day; all judgements final to the point where all preexisting records are burned….. Then you’ll get the above mentioned rottenness purged quickly, decisively and once-and-for-all.
Perhaps a bit seemingly “chaotic” for a few months to a year or two. But then, America will be cancer free. Rather than it indefinitely remaining the disgusting, totalitarian, theft infested cesspool; ran by idiots, for idiots and idiots only; which is what refusal to follow Mellon’s advice, at that critical juncture, has by now reduced it to.
0
0
yooj
yooj
4 years ago
Reply to  JeffD
Renters will decrease spending on elastic goods and services, such as dining out, and continue to pay for inelastic ones such as rent. 
0
0
Lisa_Hooker
Lisa_Hooker
4 years ago
Reply to  yooj
Conversely, serious eaters will move to a cheaper place and continue to pay for nice dinners. After all, rent just keeps the rain off while great food feels good every time. Welcome to the younger generation.
0
0
JeffD
JeffD
4 years ago
Reply to  yooj
Then why not charge $5000/month for rent? Why don’t we have a country of people eating potatos and rice and wearing $5 clothes?
0
0
Scooot
Scooot
4 years ago
Reply to  JeffD
My take on it is as follows :
Investors in financed rental properties need higher rents to cover higher interest rates. If rates rise far enough they’d be making a loss so initially the temptation is to raise rents, especially if they’d been property shortages. However, this will be met by resistance as people can’t afford them, and if severe enough , properties will become vacant causing forced sellers, therefore depressing prices and rents. However the actual rental yield will be higher with higher interest rates. It’s all down to timing.
0
0
TheWindowCleaner
TheWindowCleaner
4 years ago
By amending its charter (or by creating a new monetary authority) it could implement a $1000/mo. universal dividend to everyone 18 and older and distribute a 50% rebate to retailers for their 50% discount to consumers on everything. Of course if every adult had $1000/mo. that could purchase $2000/mo. of goods and service with that 50% discount at retail sale we wouldn’t need workers and businesses paying the payroll taxes for welfare, unemployment insurance and even for social security. With the 50% Discount/Rebate policy at retail sale macro-economically integrating beneficial price and asset deflation into profit making economics fiscal austerity would make less sense than it already does and we’d be free to create the most modern, efficient and ecologically sane infrastructure possible, and we’d reverse the trend of China eating our lunch because they have a more pragmatic and less stupid attitude toward the present financial paradigm of Debt Only…and we’d be able to indeed “Make America Great Again”. What irony.
0
0
Lisa_Hooker
Lisa_Hooker
4 years ago
Reply to  TheWindowCleaner
Yup, if we would just break more windows everyone would have work and we would all become rich.
0
0
vanderlyn
vanderlyn
4 years ago
Reply to  Lisa_Hooker
a bastiat fan.   love it.  hat tip lisa hooker.     in 80s in brooklyn,  on my block,  we’d wake up and all the little windows, i think called opera windows on our cars was busted.  more than once in a short window of months.   took my 75 malibu to glass guy in his home garage, a cop.   told me it was local mafia paying young thugs to just bust the little windows.   the highest profit ones for the mob owned auto glass shop.    it was a very sicilian hood.   i’m one, too.    i learned later in life about broken glass theory and had a good chuckle.   
0
0
Maximus_Minimus
Maximus_Minimus
4 years ago
Reply to  Lisa_Hooker
I agree.
Yours truly, Paul K.
0
0
TheWindowCleaner
TheWindowCleaner
4 years ago
Reply to  Lisa_Hooker
Not suggesting that, and in an economy with the new monetary paradigm we’d be free to direct the economy in more rational ways than the rigid and deluded free market zealots are willing to countenance. Genuine new paradigms are not only universally beneficial phenomena, they are also great because of their “knock on” enablements. But you have to be willing to actually look at and consider them. That’s the rub for those stuck in the orthodoxies of “some long dead economic scribbler”.
0
0
StukiMoi
StukiMoi
4 years ago
Reply to  TheWindowCleaner
“we’d be free to direct the economy”
Who the heck are “we?” The arbitrary guys who have to pay arbitrary sums, in order to hand such arbitrary “rebates” to other guys arbitrarily “deemed” “retailers” by the usual army of entirely arbitrary “deemedrs” and “holders” and “deciders” and “judges” and “The People’s Leaders?”
“Genuine new paradigms are not only universally beneficial phenomena,”
No they’re not. Universally beneficial phenomena are, by definition, favored by evolution. And have been for billions of years. Hence are, almost vanishingly unlikely, to anymore be “genuine new.”
0
0
vanderlyn
vanderlyn
4 years ago
the fed, which is a ponzi scheme does NOT fear inflation of anything.    they fear deflation and a 1929 style crash and burn depression.    fyi, the farm prices were plunging in 1926 and foreclosures were happening in heartland,  due to most farm notes being 5 year balloon notes.   took a few years for wall street to catch on to bubble was already busting.       
0
0
Mish
Mish
4 years ago
Reply to  vanderlyn
The Fed will cause what they fear because they do not know what inflation is!
0
0
StukiMoi
StukiMoi
4 years ago
Reply to  Mish
“The Fed will cause what they fear because they do not know what inflation is!”
While that may be true if you cherry pick your timelines, all you have to do then, is to go further back.
Full cycle, any possible bout of temporary “deflation,” as long as it still leaves the Dollar worth less than 1/20th oz of Gold and with no possible “backstops”, is still inflation. Not deflation. 100 steps backwards, 1 step forward, is still 99 steps backwards, in the big scheme of things. In the immediate now, focusing on that one, small, forwards step may be interesting. But the general business dynamic of a Fed infested society, is still inflationary.
Furthermore, even during those brief periods where aggregate inflation may be negative, all the forces which The Fed can bring to bear on inflating, are still present: It will still be more important to be close to The Fed, than it will be to do something useful and productive. Abject Nothings on “Wall Street,” and idle “asset owners” will still be getting bigger bonuses; based on actions The Fed undertakes and actions The Fed undertakes only; than people building houses for homeless people will. Despite the latter creating real value. While the former remain; at the very best, if one wishes to be maximally generous to the lowbrows; entirely idle.
Since The Fed’s inception, the money supply has been increased to the point where 99+% of current dollars; and remember dollars are the effective claims to all wealth; have simply been printed up (that is to say stolen by debasement) and handed to Fed beneficiaries. Rather than having been earned. Whatever tiny blip of “deflation” may slip by The Fed before it’s back to the races will; at most; amount to little more than a burglar who stole absolutely everything in your house, losing an old toaster as he runs out the door. We still live in an age of near total debasement driven theft. Where property rights are virtually entirely nonexistent. Since, with 99+%, and rising, accuracy: Exactly who owns what property is, by now, the result of nothing more fundamental than systemic theft/redistribution by debasement.
So, it’s not even remotely as if we’re suddenly not going to be living in a world completely dominated by debasement mediated theft and dislocation, even if it does turn out to be true, that even broken clocks do happen to be right once in a while.
0
0
Lisa_Hooker
Lisa_Hooker
4 years ago
Perhaps the Fed should get into manufacturing necessities. They certainly have the financial resources to start several major businesses. /sarc
0
0
goldguy
goldguy
4 years ago
This is the kind of stupidity one can expect coming from DC
MO MONEY, 
0
0
FromBrussels
FromBrussels
4 years ago
Nuke Russia maybe ?   ….but then again you might get nuked too….big time so!
0
0
Naphtali
Naphtali
4 years ago
Reply to  FromBrussels
To pave the way for a great resurgence of American economic strength, nuking China would be the expected move. Equivalent to the deindustrialization of Europe in 1945. One would hope that some semblance of morality would prevail over such a move. Unfortunately, moral compass is in short supply these days.
0
0

Decorate Your Walls with Mish Fine Art Images

Click each image to view details or purchase in the store.

Stay Informed

Subscribe to MishTalk

You will receive all messages from this feed and they will be delivered by email.